Question #39
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 15
Status: Unattempted
Correct Answer: B
Question
Which of the following is most likely to prompt a company to increase dividend payments? A company's management foresees:
Answer Choices:
A. an immediate lack of profitable investment opportunities
B. reduced availability of credit in the market
C. continued volatility of the company's earnings
Explanation
When earnings are volatile, companies are more hesitant to increase dividends, as there
are greater chances that a higher dividend may not be covered by future earnings. When
there is reduced availability of credit in the market, a strong cash position—such as might
be gained from cutting dividends—is a benefit. A company that foresees few profitable
investment opportunities tends to pay out more in dividends, since these opportunities
would otherwise be funded with cash flows from earnings.