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. Penalty tax Impairment of capital rule Availability of cash Bond indenture 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. Favors a High Payout Favors a Low Payout Factor A company has a large retained earnings balance on its balance sheet but has very little cash and almost no other liquid assets. A company has an established credit line that it can access when it needs an external source of O funding. A firm expects to need financing in the future and wants to avoid the risk of dilution associated with the O issuance of new shares. 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