CS Executive · Corporate Accounting and Financial Management · Dividend Decisions
Which of the following is most likely to lead a company to adopt a LOWER dividend payout ratio?
A company with many profitable growth projects needing internal funds is likely to adopt a lower payout ratio, because retained earnings are a cheap source of finance for those projects. Stable earnings, high cash and income-seeking shareholders push payout higher instead.
- AA large number of profitable growth projects needing internal fundsCorrect
- BStable earnings and ample liquid cash balances
- CShareholders who are mostly retired persons seeking regular income
- DEasy access to cheap external borrowing with no growth needs
Explanation
Abundant profitable investment opportunities make retained earnings valuable, so the firm retains more and pays less. Stable earnings, ample cash and income-seeking shareholders favour higher payouts. Easy borrowing with no growth needs also does not require retention.
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