8. Factors that influence dividend policy Dividend 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. The states that common dividends cannot be paid if the company has not paid its preferred stock dividends. 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 favor high or low payout ratios. Factor Favors a High Payout Favors a Low Payout A firm has limited investment opportunities. Taxes on capital gains are deferred until the capital gain is realized, but taxes on dividends are due in the year in which they are received. A firm expects to require funding in the future and wants to avoid the risk of dilution with the issuance of new shares. o Having the ability to accelerate or delay projects makes it for a firm to adhere to a stable dividend policy. A firm with flotation costs is more likely to have a high dividend payout ratio