Which of the following pairs of a factor affecting dividend decision…

The correct answer is Option (1) → Contractual constraints – While granting loans, the lender may impose certain restrictions on the payment of dividends in future.

Option (1) Contractual constraints – While granting loans, the lender may impose certain restrictions on the payment of dividends in future. — Correct. Contractual constraints come from loan agreements. The lender may limit future dividends, and the company must not break these terms.

Option (2) Stock market reaction – Companies having good growth opportunities retain more money out of their earnings. — Incorrect. This line describes growth opportunities. Stock market reaction means share prices tend to rise when the dividend is raised and fall when it is cut.

Option (3) Shareholders’ preference – Certain provisions of the Companies Act place restrictions on payouts as dividend. — Incorrect. This line describes legal constraints. Shareholders’ preference means the management keeps in mind shareholders who want at least a certain dividend.

Option (4) Access to capital market – The payment of dividend involves an outflow of cash. — Incorrect. This line describes the cash flow position. Access to capital market means large, reputed companies raise funds easily, so they depend less on retained earnings and tend to pay higher dividends.