Other dividend policy issues Several factors affect a firm's ability to pay a dividend. Three such factors are described in the table: profitability (an increase in net income),
investment opportunities, and capital structure (an increase in the debt ratio). Use the table to indicate how a firm's ability to pay a dividend is affected by the factors described.
(Hint: Consider each factor in isolation, with everything else held the same.)
Ability to Pay Dividends The ability to pay dividends The ability to pay dividends The ability to pay dividends Factors Affecting Dividend Payment Net income increases. More profitable investment opportunities are available. The firm increases its debt ratio. Dernham Burnham Inc. is a typical company that is very concerned with meeting investors’ expectations and keeping investors happy. Its earnings tend to fluctuate from year to year because of the nature of the business the company is in. Which of these statements most likely describes Dernham Burnham Inc.’s dividend policy?
A. Despite the fact that Dernham Burnham Inc.'s earnings tend to fluctuate from year to year, the company most likely pays a predictable, stable dividend each year.
B. Dernham Burnham Inc. most likely pays very large dividends in years with high earnings and small dividends in the years with low earnings. Grade It Now Save & Continue Continue without save in