CS Executive · Corporate Accounting and Financial Management · Dividend Decisions
Which of the following is a legal or contractual restriction that can limit a company's ability to pay dividends?
A loan covenant that bars dividend payment when the current ratio drops below a set level is a contractual restriction. Lenders use such clauses to protect their funds, so the company must comply even if it has profits. Tax status, share price and investor preferences are not binding restrictions.
- AA loan covenant prohibiting dividends if the current ratio falls below a stated levelCorrect
- BThe personal tax bracket of its promoters
- CThe company's market price per share
- DThe preference of small investors for bonus shares
Explanation
Lenders often insert covenants restricting dividends when liquidity or leverage ratios breach agreed limits, so these directly constrain payout. Promoters' tax brackets, market price and investor preferences may influence policy but are not legal or contractual restrictions.
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