Read the following statements : Assertion (A) and Reason (R).
Assertion (A) : The dividend in growth companies is smaller than that in the non-growth companies.
Reason (R) : Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment.
Choose the correct alternative from the options given below :
Read the following statements : Assertion (A) and Reason (R).
Assertion (A) : The dividend in growth companies is smaller than that in the non-growth companies.
Reason (R) : Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment.
Choose the correct alternative from the options given below :
Show Hint
- Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
- Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
- Assertion (A) is true, but Reason (R) is false.
- Assertion (A) is false, but Reason (R) is true.
The Correct Option is A
Solution and Explanation
This is an Assertion and Reason question. We must check if A is true, if R is true, and if R explains A.
The topic is the dividend decision in financial management.
Step 2: Check Assertion (A):
Assertion (A) says the dividend in growth companies is smaller than in non-growth companies.
A growth company needs a lot of money for new projects, so it pays out less to shareholders.
So Assertion (A) is true.
Step 3: Check Reason (R):
Reason (R) says companies with good growth opportunities retain more of their earnings to finance the needed investment.
This is a correct factor affecting the dividend decision. So Reason (R) is true.
Step 4: Link R with A:
Growth companies keep more profit inside the business, so less is left to pay as dividend.
That is why their dividend is smaller. So R is the correct explanation of A.
Step 5: Why the other options are wrong:
(B) says R is not the correct explanation. This is wrong, as retention of earnings is the very reason for the smaller dividend.
(C) says R is false. This is wrong, as R states a real fact.
(D) says A is false. This is wrong, as growth firms do pay a smaller dividend.
Final Answer:
Both A and R are true and R explains A. The correct option is (A).
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Read the following statements : Assertion (A) and Reason (R).
Assertion (A) : The cost of debt is higher than the cost of equity for a firm.
Reason (R) : The lender’s risk is lower than the equity shareholder’s risk, since the lender earns an assured return and repayment of capital.
Choose the correct alternative from the options given below :
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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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