Identify some practical considerations that affect a firm's payout policy
What will be an ideal response?
A number of practical considerations will have an impact on a firm's decision to pay dividends. Some of the more
obvious ones include the following.
Legal constraints: certain legal restrictions can limit the amount of dividends a firm may pay. These fall into two
categories. First, statutory restrictions may prevent a company from paying dividends. For example (1 ) if the firm's
liabilities exceed its assets, (2 ) if the amount of the dividend exceeds the firm's accumulated profits (retained earnings),
and (3 ) if the dividend is being paid from capital invested in the firm. The second type of legal restriction is unique to
each firm and results from the restrictions in debt and preferred stock contracts. To minimize their risk, investors
frequently impose restrictive provisions on managers as a condition to their investment in the company.
Liquidity constraint: a firm can be extremely profitable and still be cash poor. Because dividends are paid with cash,
and not with retained earnings, the firm must have cash available for the dividends to be paid. Hence, the firm's
liquidity position has a direct bearing on its ability to pay dividends.
Earnings predictability: A company's dividend payout ratio depends to some extent on the predictability of a firm's
profits over time. If its earnings fluctuate significantly, the firm's managers know they cannot necessarily rely on
internally generated funds to meet its future needs and the firm is likely to retain larger amounts to ensure that money
is available when needed. Conversely, a firm with a stable earnings trend will typically pay out a larger portion of its
earnings in dividends.
Maintaining Ownership Control: for many small and medium-sized companies, maintaining voting control is a high
priority. If the current common stockholders are unable to participate in a new offering, issuing new stock is
unattractive in that control of the current stockholder is diluted. The owners might prefer that managers finance new
investments with debt and retained earnings rather than issue new common stock. This firm's growth is then
constrained by the amount of debt capital available to it and by the company's ability to generate profits.
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Poweroxi Inc. produces rocket propellant fuel that is used in space shuttles. NASA is an agency that requires rocket propellant fuel to send its rockets to space. NASA enters into a contract with Poweroxi Inc. to purchase all of the propellant fuel it will need that year from Poweroxi. Which of the following conditions would constitute a breach in? contract?
A) if Poweroxi sold to another purchaser
B) if Poweroxi sold to another purchaser at a lower price
C) if NASA purchased fuel from another seller
D) if NASA stopped purchasing from Poweroxi due to lack of need
Which of the following is true of replies to requests for credit information??
A) They are always complicated.? B) ?They always follow an inductive sequence. C) They present the main idea at the end.? D) ?They involve ethical and legal obligations.
The ________ is the primary location in the United States to trade currency options
A) Philadelphia Stock Exchange B) Chicago Board of Trade C) Chicago Mercantile Exchange D) New York Stock Exchange
Signals or synchronous messages occur when a program does not wait for a returning message
Indicate whether the statement is true or false