Question

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

II is true

1. Tax rates are the primary determinate of dividend policy

FALSE

Since dividends do not reduce the tax burden, tax rates are not an important factor for deciding the dividend policy.

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

True

Higher dividend means that the retained earnings are lesser. This reduces the growth of the business and delays earnings.

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

FALSE

Management wants to retain more profits for future growth and so they do not want to give out too much dividend.