9. 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 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 on dividend payments based on the liquidity position of the firm. 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 Availability of cash O Impairment of capital rule O Bond indenture O Penalty tax A company's dividend policy can also be affected by factors internal to the organization and by the external (macroeconomic) environment in which the business operates. In the table that follows, identify which factors, in general, tend to favor high or low dividend payout ratios. Factor A firm has several investment opportunities and limited internal cash flow generation. A firm has limited investment opportunities. A closely held firm has a majority of its shareholders in high marginal tax brackets. Favors a High Payout Favors a Low Payout When a firm has a large number of profitable investment opportunities, it will usually have a target payout ratio. A firm that can increase its debt ratio without raising its weighted average cost of capital sharply is likely to have a stable dividend policy