9. Factors that influence dividend policy Aa Aa E 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 Option contract O Bond indentures Availability of cash Legal restrictions 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 High Payout Low Payout Factor 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 has limited investment opportunities. A closely held firm has a majority of its shareholders in high, marginal tax brackets. 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. 9. Factors that influence dividend policy Aa Aa E 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 Option contract O Bond indentures Availability of cash Legal restrictions 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 High Payout Low Payout Factor 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 has limited investment opportunities. A closely held firm has a majority of its shareholders in high, marginal tax brackets. 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
