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CMA Intermediate · Financial Management and Business Data Analytics · Dividend Decisions and Dividend Theories

Which one of the following situations would most likely lead a firm to PAY A LOWER dividend payout ratio?

A firm with high growth opportunities and limited access to external capital will pay a lower payout ratio. Such a firm depends on internal accruals to fund expansion, so it retains more profit instead of distributing it, unlike firms with spare cash or income-seeking shareholders.

  1. AHigh growth opportunities with limited access to external capitalCorrect
  2. BLarge and stable cash balances with few investment projects
  3. CShareholders who are mostly retired and need regular income
  4. DHighly stable earnings with strong access to the capital market

Explanation

Firms with strong growth needs and difficulty raising external funds depend on retained earnings, so they pay less. Excess cash, income-seeking shareholders and stable earnings with easy market access all support higher payouts.

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