Question

Please answer ASAP:Which of the following may tend to keep dividends low? I. a state law restricting dividends in excess of retained earnings II. a term contained in bond indenture agreements III. the desire to maintain constant dividends over time IV. significant flotation costs

II and III only

I and IV only

II, III, and IV only

I, II, and III only

I, II, III, and IV

Answer 1

Answer: last option - 1, 2, 3 and 4

1. A company whose business is declining can pay out dividends from their accumulated profits over the years. However, if there is a restriction on the company to pay dividends only from the retained earnings, this could lead to decrease in the dividends

2. There can be terms or covenants in the Bond indenture agreement which could restrict the payment of dividends, hence causing the low payout for the same.

3. If a company has a policy to payout constant dividends and not vary it as per the financial performance of the company, it could lead to lower dividend payout ratio for the company, since increase in net income does not have a proportionate increase in the dividends paid out to the stockholders.

4. Equity is issued to generate funds for a company. In case the floatation cost is high, company would prefer to retain the net income to ensure use of internally generated funds for sustaining the capital needs of the company, rather than distributing the net income as dividends, since that would require issuing more equity for the capital needs.