‘If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same.’
The factor affecting dividend decision discussed above is :
‘If the shareholders in general desire that at least a certain amount is paid as dividend, the companies are likely to declare the same.’
The factor affecting dividend decision discussed above is :
Show Hint
- Stability of dividends
- Amount of earnings
- Legal constraints
- Shareholders’ preference
The Correct Option is D
Solution and Explanation
The statement says shareholders in general want at least a certain amount to be paid as dividend.
If they want this, the company is likely to declare it.
So the dividend decision is being shaped by what the shareholders want.
Step 2: Identify the factor:
The wish of shareholders about how much dividend they get is the preference of shareholders.
Some prefer regular income, so the company tries to meet that need.
Hence option (D) Shareholders preference is correct.
Step 3: Check option (A) Stability of dividends:
This means paying a steady or rising dividend per share over the years.
The statement is about what shareholders desire, not about keeping the payout steady. So (A) is wrong.
Step 4: Check options (B) and (C):
(B) Amount of earnings: dividends are paid out of current and past profits, so higher earnings allow more dividend. The statement does not talk about profits.
(C) Legal constraints: rules in the Companies Act. The statement has no mention of law.
Both are wrong.
Final Answer:
The factor discussed is the preference of shareholders, option (D).
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‘Quality Foods Ltd.’, a company manufacturing packaged snacks has been in business for the last 10 years. It enjoys a good reputation and has a loyal customer base. This financial year, the profits of the company increased manifold as the company introduced a new range of baked snacks that became very popular. As the year came to an end, the company had to decide how much dividend to pay to its shareholders. In view of the above and with the understanding that investors, in general, view an increase in dividend as good news and stock prices react positively to it, the Board of Directors were keen on declaring a high dividend. However, the Chief Finance Officer of the company pointed out that they need to keep many considerations in mind before declaring dividend. He drew the attention of the Board of Directors to the loan that the company has taken, containing a clause that imposes restriction on the payment of dividend. Further, he pointed out that even though the profits were high, a large amount of money was tied to the amounts receivables from the debtors. Without enough cash in hand, announcing a high dividend may not be practical. He also reminded the Board of Directors that ‘Quality Foods Ltd.’ was planning to expand into the breakfast cereal market. Since this new project will require a huge investment, the company will need to retain more money out of their earnings to finance it.
(a) Identify and explain any two factors affecting dividend decision that would have influenced the decision of the Board of Directors to pay a high dividend.
(b) Identify and explain any two factors to which the Chief Finance Officer drew the attention of the Board of Directors.
A position when a company is unable to meet its fixed financial charges like interest payment, dividend on preference shares and repayment obligations is referred to as ______ .
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