Skip to content

CA Intermediate · Financial Management and Strategic Management · Dividend Decision

A company follows a stable dividend policy under which it pays a fixed rupee dividend per share every year and raises it only when earnings have risen to a level that appears permanent. Which of the following is the most direct advantage of this policy to shareholders?

The main advantage of a stable dividend policy is that shareholders get certainty about their income and read the steady payout as a signal of stability. A constant payout ratio, by contrast, makes dividends vary with profit, and the company must still plan liquidity.

  1. AIt lets the company retain the maximum possible earnings for growth
  2. BIt gives shareholders certainty about the income they will receive and signals stabilityCorrect
  3. CIt makes dividend equal to a constant percentage of each year's profit
  4. DIt removes the need for any liquidity planning by the company

Explanation

A stable dividend policy reduces uncertainty for shareholders, especially those who depend on dividends for regular income, and signals steady prospects. Option 3 describes a constant payout ratio policy, where dividends fluctuate with profit, so it is wrong. The company still needs liquidity planning to meet the fixed payout.

Did you get it right without looking?

One question tells you little. A timed set on Dividend Decision shows your real accuracy, how long you take and where you lose marks.

Practise Dividend DecisionFree diagnostic mock

More Dividend Decision questions