Question

9. Factors that influence dividend policy Аа Аа 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. Consider the following restriction: Restrictions on dividend payments not to exceed the total amount of retained earnings on a firm's balance sheet. 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. OImpairment of capital rule Bond indentures Availability of cash O Option contract

Answer 1

1. Restriction o dividend pay-out:
   1. Impairment of capital;- this rules restricts the maximum amount of dividend allowed to be paid. it stipulates that dividends cannot exceed the amount of retained earnings listed on the balance sheet.
   2. Bond indenture: legal contract between issuer and trustee about the responsibility of both of them
   3. Availability of cash
   4. Option contract: a contract between buyer and seller about the purchase and sale of asset.

So the answer is A.

2. Factors
   1. Taxes- low payout – to avoid taxes amount
   2. Limited investment- high pay-out
   3. Need financing in future- low payout- to save more as retained earnings for the future.
3. Large investment opportunity- low pay-out- to save it to invest to earn.
4. Lower floatation cost- high dividend payout , as the floatation cost decreases the dividend payout.