The correct factor affecting Dividend decision is:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Cash flow position
Option (1) Control considerations — Incorrect. This is a factor in the financing decision. Issuing more equity shares brings in new owners, and that can weaken the control of the existing shareholders. So a firm worried about control prefers debt. It has nothing to do with how much profit is paid out.
Option (2) Fixed operating costs — Incorrect. This is also a financing-decision factor. A firm with high fixed costs, such as rent and salaries, must pay them even when sales fall. So it should borrow less.
Option (3) Cash flow position — Correct. The dividend decision is about how much of the profit is paid to shareholders and how much is kept back in the business. Paying a dividend means cash going out. A company may earn a profit and still be short of cash. So the cash actually available limits the dividend it can declare.
Option (4) Floatation costs — Incorrect. These are the costs of raising funds, such as brokerage and underwriting on an issue of shares. They make a source of finance costlier, so they belong to the financing decision.
NCERT (2026-27 Edition): “Factors Affecting Dividend Decision How much of the profits earned by a company will be distributed as profit and how much will be retained in the business is affected by many factors. …” “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.” “Fixed Operating Costs: If a business has high fixed operating costs (e.g., building rent, Insurance premium, Salaries, etc.), It must reduce fixed financing costs. Hence, lower debt financing is better. …” |