9. 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 Consider the following restriction: Restrictions in debt agreements 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 O Penalty tax O Bond indentures O Impairment of capital rule O Option contract A company's dividend policy can also be affected by factors internal to the organization and by the extemal (macroeconomic) environment in which the business operates. I general, tend to favor high or low dividend payout ratios. n the table that follows, identify which factors, in Favors a Favors a High Payout Low Payout Factor A firm has several investment opportunities and limited internal cash flow generation. A firm has limited investment opportunities. 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. for a firm to adhere to a stable dividend policy. Having the ability to accelerate or delay projects makes it If management is concerned with keeping control of the company, it will be likely to retain otherwise would to avoid diluting control by issuing new stock to raise capital. eanings than it