Question #37
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 14
Status: Unattempted
Correct Answer: A
Question
Which of the following is least likely to discourage a company from making high dividend payouts? The company's:
Answer Choices:
A. shareholders are primarily tax-exempt institutions
B. flotation costs are high
C. bondholders are protected by strong debt covenants
Explanation
Taxes on dividends are one factor that sometimes discourages companies from paying
dividends, however if most shareholders are tax exempt, tax considerations are unlikely to
discourage a company from making dividend payouts. A company with high flotation costs
is less likely to pay out high dividends, to ensure that projects can be financed through
earnings and to thus avoid the expense of issuing new shares. Bondholders are often
contractually protected from high dividend payouts; strong debt covenants are likely to
prevent the company from making high dividend payouts.