Question

15. This question technically relates to Chapter 14, but we also discussed this in lecture. Which of the following statements about dividend policy is (are) most likely TRUE:

1. Tax rates are the primary determinate of dividend policy

2. Increases in dividends tend to lag increases in earnings per share

3. Management is usually reluctant to decrease dividend payments unless absolutely necessary

1. I

2. II

3. III

4. I, III

5. II, III

Answer 1

Answer : " II, III" (ie. increases in dividends tend to lag increases in earnings per share AND management is usually reluctant to decrease dividend payments unless absolutely necessary )

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The "II" one is most true because increases in dividends leads to less plough-back of income, which makes concern to incur interest on Borrowing (for expansion or operation purpose) which lags increases in EPS.

The “III” one is also most true because decrease in dividend shows bad financial and economic condition of the company before investors, therefore the management is usually reluctant to do so unless absolutely necessary.