This is one question but couldn\'t capture it in one shot.Please attempt to answ

Question

This is one question but couldn't capture it in one shot.Please attempt to answer it correctly. Thanks

9. Factors that influence dividend policy Aa 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 availability and cost of alternative sources of capital, and other external factors when they create and implement their distribution policy. Consider the following restriction: Limits set by the IRS on the amount of eamings a firm can retain for reasons that help individuals gain special benefits 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 Impairment of capital rule O Option contract O Penalty tax O Bond indentures

Explanation / Answer

Answer:

1. The restricion imposed by the IRS is a Impairment of Capital Rule Constraint because it forces the Companies to impare its capital invested by the individuals.

2. When capital gain taxes are deferred and taxes on diivdend is current then it will favour a low dividend payout to take tax benefits of deferement.

3. When the investment oportunities are limited then it will favour a high payout by the firm after limited investments if found fit.

4. Increase in requirement of cash balances will favour retention of profits or we can say that it will favour low payouts.

5. Having ability to accelerate or delay projects makes it easier for a firm to adhere to a stable dividend policy.

6. A firm taht can adjust its debt ratio without raising its weighted average cost of capital (WACC) sharply is more likely to have a stable dividend policy. Because when the WACC does not change sharply the share holder expectation does not differ and thus the firm can service them at stable dividend payouts.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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