While taking a loan from a financial institution, ABC Enterprises signed an agreement that they shall not pay dividend to its shareholder more than 10% until the loan is repaid, or dividend shall not be declared if the liquidity ratio is found to be less than 1:1. Identify the factor related to dividend decision being described in the above case.

Contractual Constraints

The correct answer is option 1- Contractual Constraints.

Contractual constraints refer to restrictions imposed by lenders or creditors as part of a loan agreement or covenant. In this case, ABC Enterprises agreed not to pay dividends beyond a certain limit or under specific financial conditions (like liquidity ratio) — these are terms set by the financial institution, hence contractual in nature.

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.