7. Factors that influence dividend policy 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 avallability and cost of alternative sources of capital, and other external factors when they create and implement their distribution policy. Consider the following condition: Restrictions in debt contracts that state the maximum amount of dividends that can be paid in any year 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. Option contract Legal restrictions Bond indentures Along with several constraints, several internal factors within a company and external macroeconomic factors affect a firm's dividend policy. In the table, identify which factors, in general, tend to favour high or low payout ratios. Having the ability to accelerate or delay projects makes it for a firm to adhere to a stable dividend policy. A firm that can adjust its debt ratio without raising its weighted average cost of capital (WACC) sharply is likely to have a stable dividend policy