The problem with the constant dividend payout ratiois: a. Investors may come to
ID: 2661811 • Letter: T
Question
The problem with the constant dividend payout ratiois:a. Investors may come to expect a specified amount. b. The dollar amount of the dividend fluctuates from year toyear. c. Management is reluctant to cut the dividend even if thereare low profits that year. d. All of the above are possible problems. The problem with the constant dividend payout ratiois:
a. Investors may come to expect a specified amount. b. The dollar amount of the dividend fluctuates from year toyear. c. Management is reluctant to cut the dividend even if thereare low profits that year. d. All of the above are possible problems.
Explanation / Answer
The answer is D, all of the above. Investors will come toexpect a specific amount based on the firm's performance. Also, the dollar amount of the dividend will fluctuate yearly basedon performance, whereas similar dollar amounts arepreferable. Finally, management will be reluctant to cut thedividend even during a low-profit year, as cutting dividends isseen as unfavorable in the eyes of investors. This willresult in upward pressure in dividend prices.
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