2. Other dividend policy issues Aa Aa Several factors affect a firm\'s ability t

Question

2. Other dividend policy issues Aa Aa Several factors affect a firm's ability to pay a dividend. Three such factors are described in the table: profitability (an increase in net income), investment opportunities, and capital structure (an increase in the debt ratio). Use the table to indicate how a firm's ability to pay a dividend is affected by the factors described Hint: Consider each factor in isolation, with everything else held the same.) Factors Affecting Dividend Payment Ability to Pay Dividends Net income increases. More profitable investment opportunities are available. The firm increases its debt ratio. The ability to pay dividends The ability to pay dividends The ability to pay dividends Spandelay Industries Inc. is a typical company that is very concerned with meeting investors' expectations and keeping investors happy. Its earnings tend to fluctuate from year to year because of the nature of the business the company is in. Which of these statements most likely describes Spandelay Industries Inc.'s dividend policy? O Spandelay Industries Inc. will be willing to increase its dividend only if it believes that it will be able to maintain the dividend increase in future years. O Spandelay Industries Inc. will increase its dividends in years when it has high earnings so that it can distribute excess free cash flows to investors, even if it means that the firm will have to reduce its dividend in subsequent years.

Explanation / Answer

1
If income increases, ability to pay dividends increases
2
More profitable investment opportunities are availbel, the firm would like to reinvest rather than pay dividends hence ability to pay dividends decreases
3
Firm increeases its debt ratio, interest would go up hence net income would go down so ability to pay dividends decreases

4

Concerned with investor's expectations, the firm would increase dividend only if it is able to mainatian dividend increase in future years

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