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ACCA Strategic Professional · Advanced Financial Management · Financial strategy formulation

A multinational's board asks its senior financial adviser which stakeholder-related factor most directly constrains a policy of paying minimal dividends to fund growth. Which is most relevant?

The main constraint is the signalling effect and clientele expectations. Shareholders may read a low or reduced dividend as bad news or may prefer income, so the share price could fall, which conflicts with the objective of maximising shareholder wealth.

  1. AThe signalling effect and clientele expectations of shareholdersCorrect
  2. BThe rate of exchange for the local currency only
  3. CThe company's audit fee
  4. DThe tax rate on interest receivable

Explanation

Dividend cuts convey information to the market and may upset shareholders who prefer income (clientele effect), which can depress the share price. The other options are not the main constraint on a low payout policy.

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