CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Which factor would most likely lead a company to follow a LOW dividend payout ratio?
Large profitable investment opportunities requiring internal funds lead to a low payout. The firm retains earnings to finance projects cheaply instead of raising costly external capital, whereas stable earnings, income-seeking shareholders and easy market access all favour higher dividends.
- ALarge profitable investment opportunities requiring internal fundsCorrect
- BHighly stable earnings with abundant liquidity
- CShareholders who depend on current income
- DEasy access to capital markets at low cost
Explanation
Firms with strong investment opportunities prefer retaining earnings as cheaper internal finance, lowering payout. The other options (stable earnings, income-seeking shareholders, easy market access) all support higher payouts.
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