Attempts: Average: /5 7. Factors that influence dividend policy AaAa bution deci
ID: 2793785 • Letter: A
Question
Attempts: Average: /5 7. Factors that influence dividend policy AaAa bution decisions are complicated and involve the understanding of critical strategic factors that affect the policy Distri 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. 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. States that common stock dividends cannot be paid if the company has not paid its preferred stock dividends. O Preferred stock restriction O Bond indenture O Impairment of capital rule A company's 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. here tExplanation / Answer
1.) The restriction for common stock dividends unless you pay preferred stock dividends is 'Preferred stock restriction'. Under this restriction Preferred stock is given preference during dividend payout over common equity.
2.) If a company has limited internal cash flow generation then it 'Favors a Low Payout' because a company would like to retain money for other investment opportunities.
If a company has stable earnings and expects earnings stability in the furture then it will 'Favor a High Payout' because of constant availability of cash for equity holders.
If have a company has to increase the cash balances in an inflamatory environment, then it will prefer to retain earnings and hence would 'Favor a Low Payout'.
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