The correct answer is option (3)- Contractual Constraints.
Contractual Constraints is the factor that affect dividend decision of a company.
Contractual Constraints : While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. The companies are required to ensure that the dividend does not violate the terms of the loan agreement in this regard.
OTHER OPTIONS
- Control Considerations affect financing decision.
Control Considerations: Issues of more equity may lead to dilution of management’s control over the business. Debt financing has no such implication. Companies afraid of a takeover bid would prefer debt to equity.
- Flexibility affect capital structure decision.
Flexibility: If a firm uses its debt potential to the full, it loses flexibility to issue further debt. To maintain flexibility, it must maintain some borrowing power to take care of unforeseen circumstances.
- Return on Investment affect capital structure decision.
Return on Investment (RoI): If the RoI of the company is higher, it can choose to use trading on equity to increase its EPS, i.e., its ability to use debt is greater. RoI is an important determinant of the company’s ability to use Trading on equity and thus the capital structure.
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