8. Factors that influence dividend policy Dividend distribution decisions are complicated and involve the understanding of critical...

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Finance

8. Factors that influence dividend policy
Dividend distribution decisions are complicated and involve theunderstanding of critical strategic factors that affect the policyand value of a firm. Thus, the management of any firm has toconsider the constraints on dividend payments, the availability andcost of alternative sources of capital, and other external factorswhen they create and implement their distribution policy.
Based on your understanding of the constraints on dividendpayments, identify the type of constraint this conditionrepresents. Assume that all other factors are heldconstant.
The (preferred stock restriction OR impairmentof capital rule OR bond indenture) states that commondividends cannot be paid if the company has not paid its preferredstock dividends.
Along with several constraints, several internal factors withina company and external macroeconomic factors affect a firm’sdividend policy.
In the table, identify which factors, in general, tend to favorhigh or low payout ratios.
FACTOR FAVORS A HIGH PAYOUT FAVORS A LOW PAYOUT
A closely held firm has a majority of its shareholders in high,marginal tax brackets
A firm had stable earnings in the past and expects stability inthe future.
A company recorded high retained earnings but has very littlecash and other liquid assets.
When a firm has a large number of profitable investmentopportunities, it will usually have a (high OR low)target payout ratio.
A firm with (low OR high) flotationcosts is more likely to have a high dividend payoutratio.

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8. Factors that influence dividend policyDividend distribution decisions are complicated and involve theunderstanding of critical strategic factors that affect the policyand value of a firm. Thus, the management of any firm has toconsider the constraints on dividend payments, the availability andcost of alternative sources of capital, and other external factorswhen they create and implement their distribution policy.Based on your understanding of the constraints on dividendpayments, identify the type of constraint this conditionrepresents. Assume that all other factors are heldconstant.The (preferred stock restriction OR impairmentof capital rule OR bond indenture) states that commondividends cannot be paid if the company has not paid its preferredstock dividends.Along with several constraints, several internal factors withina company and external macroeconomic factors affect a firm’sdividend policy.In the table, identify which factors, in general, tend to favorhigh or low payout ratios.FACTORFAVORS A HIGH PAYOUTFAVORS A LOW PAYOUTA closely held firm has a majority of its shareholders in high,marginal tax bracketsA firm had stable earnings in the past and expects stability inthe future.A company recorded high retained earnings but has very littlecash and other liquid assets.When a firm has a large number of profitable investmentopportunities, it will usually have a (high OR low)target payout ratio.A firm with (low OR high) flotationcosts is more likely to have a high dividend payoutratio.