Attempts: Keep the Highest: /5 7. Factors that influence dividend policy Aa Aa D

Question

Attempts: Keep the Highest: /5 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. Preferred stock restriction Bond indenture O Impairment of capital rule A company's dividend policy can also be affected by factors internal to the organization and by the external (macroeconomic) environment in which the business operates. In the table that follows, identify which factors, in general, tend to favor high or low dividend payout ratios Favors a Favors a Factor High Payout Low Payout A firm has several investment opportunities and limited internal cash flow generation A firm has a history of stable earnings and expects earnings stability in the future In an inflationary environment, a firm has to increase its cash balances to meet the rising prices of its inventory, wages, and other short-term liabilities When a firm has a large number of profitable investment opportunities, it will usually have at ratio target payout

Explanation / Answer

Impairment of capital rule restrict dividend payments hence 3rd option is correct

High payout
High payout
Low payout


Large number of profitable opportunities will lead to low target payout ratio

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