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CMA Intermediate · Financial Management and Business Data Analytics · Dividend Decisions and Dividend Theories

A company has 10 lakh shares, current-year profit of Rs 2 crore, and a stable dividend of Rs 8 per share. Profit next year falls to Rs 60 lakh, yet management still pays Rs 8 per share. What is the payout ratio next year, and which factor explains the decision?

The payout ratio is 133.3%, because the Rs 80 lakh dividend exceeds the Rs 60 lakh profit. The decision reflects a stable-dividend policy, where management avoids cutting dividends so as not to send a negative signal to the market, rather than any legal compulsion.

  1. A133.3%; desire for stable dividends to signal confidenceCorrect
  2. B40%; need for liquidity
  3. C133.3%; legal ban on cutting dividends
  4. D26.7%; tax on dividends

Explanation

Dividend = 10,00,000 x 8 = Rs 80 lakh. Payout = 80/60 = 133.3% of profit. Paying more than profit reflects a stable-dividend policy where firms avoid cuts to avoid negative signalling. No law forbids cutting dividends, and 26.7% is 16/60 computed wrongly.

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