Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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.

A) Penalty tax

B)Impairment of capital rule

C)Availability of cash

D) Bond indenture

A companys 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

Favors a High Payout

Favors a Low Payout

Taxes on capital gains are deferred until the capital gain is realized, but taxes on dividend income are due in the year in which the dividends are received.

A firm has limited investment opportunities.

A firm expects to need financing in the future and wants to avoid the risk of dilution associated with the issuance of new shares.

Having the ability to accelerate or delay projects makes it (easier or harder)_______ for a firm to adhere to a stable dividend policy.

A firm with ( lower or greater)_________ flotation costs is more likely to have a high dividend payout ratio.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Statements A Step By Step Guide To Understanding And Creating Financial Reports

Authors: Thomas Ittelson

1st Edition

1632652072, 978-1632652072

More Books

Students also viewed these Finance questions