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 Legal restrictions O Availability of cash O Option contract O 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. Favours a Favours a Factor High Payout Low Payout A company recorded high retained earnings but has very little cash and other liquid assets A firm has limited investment opportunities A closely held firm has a majority of its shareholders in high, marginal tax brackets. O Option contract O Bond indentures and external macroeconomic factors affect a Along with several constraints, several internal factors within a company fim's dividend policy. In the table, identify which factors, in general, tend to favour high or low payout ratios. Favours a Favours a Factor High Payout Low Payout A company recorded high retained earnings but has very little cash and other liquid assets A firm has limited investment opportunities. A closely held firm has a majority of its shareholders in high, marginal tax brackets. When a firm has a large number of profitable investment opportunities, it will usually have atarget payout ratio. 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