Which of the following statements about the factors affecting the dividend decision is NOT correct?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Dividend per share is generally raised as soon as the earnings of the current year go up.
Option (1) A company having stable earnings is in a better position to declare higher dividends. — True. This is stability of earnings. A company with stable earnings can declare higher dividends, while one with unstable earnings is likely to pay smaller ones.
Option (2) Dividend per share is generally raised as soon as the earnings of the current year go up. — False. Companies follow a policy of stabilising dividend per share. They raise it only when they are sure that their earning potential has gone up. A rise in one year’s earnings may be temporary, so the dividend is not changed for it.
Option (3) A company earning a profit may still be short of the cash needed to pay a dividend. — True. This is cash flow position. Paying a dividend is an outflow of cash, so a company with profit but little cash may not be able to pay.
Option (4) A decrease in dividend may have a negative impact on the share prices in the stock market. — True. This is stock market reaction. Investors see a cut in dividend as bad news, so share prices may fall.
NCERT (2026-27 Edition): “(b) Stability Earnings: Other things remaining the same, a company having stable earning is in a better position to declare higher dividends. As against this, a company having unstable earnings is likely to pay smaller 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.” |