CS Executive · Corporate Accounting and Financial Management · Dividend Decisions
Which of the following factors would generally lead a company to adopt a LOWER dividend payout ratio?
A company with large profitable expansion projects and limited access to external funds will usually pay lower dividends. Retained earnings become the cheapest and most available source of finance, so retention is preferred over distribution, reducing the dividend payout ratio.
- AStable earnings and large liquid cash balances with no investment plans
- BShareholders who strongly prefer regular current income
- CLarge profitable expansion projects to be funded from internal accruals and difficulty in raising external fundsCorrect
- DEasy access to the capital market at low cost of issue
Explanation
When profitable investment opportunities are plentiful and external finance is hard or costly, a firm retains more earnings, so payout falls. Stable earnings, ample cash, shareholder preference for income and easy market access all support a higher payout.
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