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ACCA Strategic Professional · Advanced Financial Management · Dividend policy in multinationals and transfer pricing

A multinational's board is considering a stable dividend policy that avoids cutting dividends even when subsidiaries' earnings fluctuate. Which is the main argument in favour of this approach?

The main argument is signalling and predictability. A stable dividend tells investors that management is confident about sustainable future earnings, and it suits shareholders who rely on regular income, even though subsidiary earnings and remittances may fluctuate from year to year.

  1. AStable dividends signal management's confidence about future earnings and suit shareholders who rely on predictable incomeCorrect
  2. BStable dividends maximise the retained cash available for new projects in every year
  3. CStable dividends remove all exposure to foreign exchange risk on remittances
  4. DStable dividends guarantee a higher share price regardless of investment decisions

Explanation

A stable policy conveys signalling value and gives predictable income. It does not maximise retention, remove exchange risk, or guarantee a higher share price.

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