Given below are two statements:
Statement I: Dividend is that portion of profit which is distributed to shareholders.
Statement II: Re-investment of profit as retained earnings lowers the future earning capacity of a firm.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Statement I is correct but Statement II is incorrect.
Statement I: Dividend is that portion of profit which is distributed to shareholders. — Correct. After tax, the company decides how much profit to pay out and how much to keep. The part paid to shareholders is the dividend.
Statement II: Re-investment of profit as retained earnings lowers the future earning capacity of a firm. — Incorrect. Retained earnings are put back into the business. This re-investment increases the firm’s future earning capacity, while the dividend is the shareholders’ current income.
NCERT (2026-27 Edition): “Dividend Decision The third important decision that every financial manager has to take relates to the distribution of dividend. Dividend is that portion of profit which is distributed to shareholders. The decision involved here is how much of the profit earned by company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business. While the dividend constitutes the current income re-investment as retained earning increases the firm’s future earning capacity. …” |