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ACCA Strategic Professional · Advanced Financial Management · Financial strategy formulation

Beta plc has operating profit that allows a dividend, and its shareholders mostly are high-tax individuals preferring capital gains. Which management action is MOST consistent with the clientele effect when considering a change in dividend policy?

Management should avoid a sudden large dividend increase, because under the clientele effect shareholders in high tax brackets chose Beta for its low payout and a policy change could prompt them to sell, disrupting the shareholder base and the share price.

  1. AAvoid a sudden large increase in dividends, since existing shareholders chose the company for its low payoutCorrect
  2. BRaise the dividend sharply because all shareholders prefer income
  3. CCancel all investment to fund higher dividends
  4. DIssue new shares to pay a higher dividend and thereby improve the tax position

Explanation

The clientele effect says shareholders select companies whose payout matches their tax and income preferences. A sharp change in payout may upset the existing shareholder base and cause selling. The other options ignore that preference or destroy value.

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