7. Factors that influence dividend policy Aa Aa Distribution decisions are compl

Question

7. 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. 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. Intended to protect creditors from a company distributing most of its assets to stockholders if it looks as if it is about to go under. O Preferred stock restriction O Impairment of capital rule O Bond indenture

Explanation / Answer

Answer:

1.Intended to protect creditors from a company distributing most of its assets to stockholders if it looks about to go under preferred stock restriction.

2.a)Dividend Payout is low when taxes on capital gains are deferred until the capital gain is realized, but taxes on dividend income are due in the year in which the dividends are received.

b) Favour dividend payout is high if the firm has a history of stable earnings and stable earnings are expected in future.

c).Favour low dividend payout if its inflationary condition since the company has to maintain high cash balance to meet the rising prices of its inventory, wages, and other short-term liabilities

3)when a firm has a large number of profitable investment opportunities, it will usually have low target payout ratio since it can reinvest whatever profits they can earn which can result in higher profitability.

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