13. Factors that influence dividend policy Aa Distribution decisions are complic

Question

13. Factors that influence dividend policy 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 availablity and cost of alternative sources of capital, and other extemal factons when they create and implement their distribution policy Consider the following restriction: Restrictions in daebt 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, identity the type of constraint this condition represents. Assume that al other factors are held constant. O option contract O Penalty tax O Bond indentures O Impaiment of capital rule A company's dividend policy cen aiso be affected by farctons intermal to the organization and by the extema (macroeconomic) environment in which the business operates in the table that genera, tend to favor high or low dividend puvout ation follows, identify which factors, in Favors aFavorS High Payout Low Payout lactor A company has a targe retained tnings tlancnor hi belinice swet but has very intte cash and almest no other liguid A company hes an estabiished credit ine that it can acc whws t needs an extemao source of funding A closely heid firm has·maiority of its shareholdersiin hagin marginal tax brackets.

Explanation / Answer

Question no:1 Answer is option (3) Bond indebtures Bond Indebture is contract between the bond issuers and Bond holders. It specifies the all terms and conditions to issue Bond. Restriction on Maximum amount of dividend is alos a one of the condition for Bonds issue (Bond liability). If the issuer fails to complies the conditions specified in the contract, the issuer has to face consequencies specified in the contract that means Immediate payment of Liability , Payment of Fine or penalty Question no:2 Favours High payout Favours Low payout Acompany has a large retained earnings Balance on its balance sheet But very Little cash and almost No liquid Assets Favours Low payout Explanation : when a company has low cash and Liquid assets , then it can not pay high amount of Dividend even it has High Earnings A company has an estasblished credit Line That it can access when it needs an external source of funding Favours High payout Explanation : if a company has Established credit line to access when it need , then it can pay High amount of dividend by borrowing fund if it has Large ratained earning balances A closely held firm has a majority of its share holders in high marginal Tax brackets Favours Low payout Explanation : in a closely held company , all the decisions are taken by a small group of individuals, so if they are in high tax brackets , they don’t take decisions which leads payment of high Taxes in the hands of Shareholders.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.