7. Factors that influence dividend policy Aa Aa Distribution decisions are compl

Question

7. Factors that influence dividend policy Aa Aa Distribution decisions are complicated and involve the understanding of critical strategic factors that affect the policy and value of a firm. Thus, the management of any firm has to consider the constraints on dividend payments, the availability and cost of alternative sources of capital, and other external factors when they create and implement their distribution policy. Based on your understanding of the constraints on dividend payments, identify the type of constraint this condition represents. Assume that all other factors are held constant. Intended to protect creditors from a company distributing most of its assets to stockholders if it looks as if it is about to go under. O Bond indenture O Impairment of capital rule Preferred stock restriction

Explanation / Answer

Bond indenture is the legal document which speaks about the obligations and prohibitions of the borrower. Intended to protect creditors from a company distrubuting most of its assets to its stockholders will come under negetive covenants of Bond indenture.

The first favours the high payout ratio.

The second factor relects low payout ratio.

The third factor favours low payout ratio.

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