Restrictions in debt agreements that state the maximum amount of dividends that can be paid in any year. 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. Option contract Bond indentures Impairment of capital rule Penalty tax A company's dividend policy can also be affected by factors internal to the organization and by the external (macroeconomic) environment in which the business operates. In the table that follows, identify which factors, in general, tend to favor high or low dividend payout ratios. Favors a Favors a Factor High Payout Low Payout A company has a large retained earnings balance on its balance sheet but has very little cash and almost no other liquid assets. A firm has a history of stable earnings and expects earnings stability in the future. A firm expects to need financing in the future and wants to avoid the risk of dilution associated with the issuance of new shares. When a firm has a large number of profitable investment opportunities, it will usually have a target payout ratio. If management is concerned with keeping control of the company, it will be likely to retain earnings than it otherwise would to avoid diluting control by issuing new stock to raise capital. O00O
Restrictions in debt agreements that state the maximum amount of dividends that can be paid in any year. 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. Option contract Bond indentures Impairment of capital rule Penalty tax A company's dividend policy can also be affected by factors internal to the organization and by the external (macroeconomic) environment in which the business operates. In the table that follows, identify which factors, in general, tend to favor high or low dividend payout ratios. Favors a Favors a Factor High Payout Low Payout A company has a large retained earnings balance on its balance sheet but has very little cash and almost no other liquid assets. A firm has a history of stable earnings and expects earnings stability in the future. A firm expects to need financing in the future and wants to avoid the risk of dilution associated with the issuance of new shares. When a firm has a large number of profitable investment opportunities, it will usually have a target payout ratio. If management is concerned with keeping control of the company, it will be likely to retain earnings than it otherwise would to avoid diluting control by issuing new stock to raise capital. O00O
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Restrictions in debt agreements that state the maximum amount of dividends that can be paid in any year.
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.
Option contract
Bond indentures
Impairment of capital rule
Penalty tax
A company's dividend policy can also be affected by factors internal to the organization and by the external
(macroeconomic) environment in which the business operates. In the table that follows, identify which factors, in
general, tend to favor high or low dividend payout ratios.
Favors a
Favors a
Factor
High Payout Low Payout
A company has a large retained earnings balance on its balance sheet but has very
little cash and almost no other liquid assets.
A firm has a history of stable earnings and expects earnings stability in the future.
A firm expects to need financing in the future and wants to avoid the risk of dilution
associated with the issuance of new shares.
When a firm has a large number of profitable investment opportunities, it will usually have a
target payout
ratio.
If management is concerned with keeping control of the company, it will be likely to retain
earnings than it
otherwise would to avoid diluting control by issuing new stock to raise capital.
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