CA Intermediate · Financial Management and Strategic Management · Dividend Decision
Which of the following is a factor that would generally encourage a company to pay a LOWER dividend payout ratio?
A firm with large profitable investment opportunities tends to pay a lower dividend payout, because retained earnings are a cheap internal source of finance for projects earning more than the cost of capital. Ample cash, income-seeking holders and stable earnings favour higher payouts.
- AStable and ample liquidity with few investment opportunities
- BLarge profitable investment opportunities available to the firmCorrect
- CShareholders mainly being retired persons needing regular income
- DA stable earnings record over many years
Explanation
When a firm has profitable projects with returns above its cost of capital, retaining earnings is cheaper than raising external funds, so payout falls. The other options (ample liquidity with no projects, income-seeking shareholders, stable earnings) all support higher or steady dividends.
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