There are three practical considerations in selecting a firm's dividend policy: restrictions on legal capital, restrictive bondholder covenants, and constraints on cash availability
Define and discuss each of these items and the impact of each on the formulation of a firm's dividend policy.
What will be an ideal response?
Answer: Legal capital is the original contributions of the firm's shareholders and is defined as par value plus paid-in-capital in excess of par value. Most states do not allow a firm to reduce legal capital to make a dividend payment.
Corporate bond contracts can contain covenants that restrict the payment of dividends for a number of reasons, such as restricting dividends to a certain percentage of current earnings.
Cash availability is a natural restriction on dividends. If a firm is restricted to accumulated cash on hand for dividends, this limits the amount a firm can pay.
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a. affects the amount of net income reported during an accounting period, but has no effect on the total book value of plant assets on the balance sheet. b. affects the total book value of plant assets on the balance sheet, but has no effect on the amount of net income reported during an accounting period. c. affects the total book value of plant assets reported on the balance sheet and the amount of net income reported during a period. d. has no effect on the book value of plant assets on the balance sheet or the amount of income reported on the income statement.
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Choose the correct word or words in parentheses. Daphne and (I, me) have never been to New York
Which of the following is not a strategy of corporations in the environment of financialization?
A. nonfinancial companies adding financial services such as offering credit or loans to customers B. selling off assets of the company after implementing cost-cutting measures C. repurchasing company stock to drive up the price D. investing in public sector services and infrastructure