CS Executive · Corporate Accounting and Financial Management · Dividend Decisions
Which one of the following is a recognised disadvantage of a constant payout ratio policy from the shareholders' viewpoint?
The disadvantage is that dividend becomes unstable and falls to nil when there is no profit. Since a constant payout ratio links dividend directly to earnings, shareholders cannot depend on a steady income, unlike under a stable dividend per share policy.
- ADividend is certain in every year irrespective of losses
- BDividend amount is unstable and may be nil when profit is nilCorrect
- CIt ignores the firm's profit completely
- DIt requires a fixed rupee dividend each year
Explanation
Because payout is tied to earnings, dividend varies with profit and becomes zero in a loss year, creating uncertainty for investors. The other options describe features of a stable rupee dividend policy, not this one.
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