How many of the following statements about the factors affecting dividend decision are correct?
(A) Dividend per share is not altered if the change in earnings is small or seen to be temporary.
(B) Smaller companies with relatively low access to the capital market tend to pay higher dividends than large companies.
(C) A company that earns a profit but is short on cash may find it difficult to declare a dividend.
(D) A decrease in dividend may have a negative impact on the share prices in the stock market.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Only three
(A) Dividend per share is not altered if the change in earnings is small or seen to be temporary. — Correct. Companies try to keep a stable dividend per share. They raise it only when they are sure earnings have gone up for good.
(B) Smaller companies with relatively low access to the capital market tend to pay higher dividends than large companies. — Incorrect. It is the large and reputed companies, with easy access to the capital market, that pay higher dividends. They depend less on retained earnings to grow. Smaller companies with low access pay lower dividends.
(C) A company that earns a profit but is short on cash may find it difficult to declare a dividend. — Correct. Paying a dividend is an outflow of cash. A company may earn a profit but be short on cash, and then it cannot easily pay.
(D) A decrease in dividend may have a negative impact on the share prices in the stock market. — Correct. Investors see a cut in dividend as bad news. So a decrease in dividend may push share prices down.
NCERT (2026-27 Edition): “(c) Stability of Dividends: Companies generally follow a policy of stabilising dividend per share. The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year. In other words, dividend per share is not altered if the change in earnings is small or seen to be temporary in nature.” “(e) Cash Flow Position: The payment of dividend involves an outflow of cash. A company may be earning profit but may be short on cash. Availability of enough cash in the company is necessary for declaration of dividend.” “(h) Stock Market Reaction: Investors, in general, view an increase in dividend as a good news and stock prices react positively to it. Similarly, a decrease in dividend may have a negative impact on the share prices in the stock market. Thus, the possible impact of dividend policy on the equity share price is one of the important factors considered by the management while taking a decision about it.” “(i) Access to Capital Market: Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earning to finance their growth. These companies tend to pay higher dividends than the smaller companies which have relatively low access to the market.” |