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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Financial Management

Which of the following decisions falls under the finance function of dividend decision rather than investment or financing decision?

Deciding what proportion of earnings to pay out as dividends and what to retain is the dividend decision. The other options relate to financing mix, capital investment and working capital management respectively.

  1. AChoosing between a term loan and a rights issue to fund a new plant
  2. BDeciding what proportion of current earnings to distribute to shareholders and what to retainCorrect
  3. CSelecting between two machines with different cash flow patterns
  4. DDeciding the level of inventory to carry for raw materials

Explanation

The dividend decision concerns the split of earnings between payout and retention. Choosing a term loan versus rights issue is a financing decision, choosing machines is an investment (capital budgeting) decision, and inventory level is a working capital decision.

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