Which of the following pairs of a factor affecting the dividend decision and its description is correctly matched?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Stock market reaction – Investors, in general, view an increase in dividend as a good news.
Option (1) Stability of dividends – A company having stable earning is in a better position to declare higher dividends. — Incorrect. This describes stability of earnings. Stability of dividends is the policy of keeping the dividend per share steady from year to year.
Option (2) Legal constraints – While granting loans, the lender may impose certain restrictions on the payment of dividends in future. — Incorrect. Limits put by a lender in a loan agreement are contractual constraints. Legal constraints are the provisions of the Companies Act that restrict dividend payouts.
Option (3) Growth opportunities – Large and reputed companies may depend less on retained earning to finance their growth. — Incorrect. This describes access to capital market. Large firms can raise funds easily, so they keep back less profit. Growth opportunities means that firms with good chances to grow retain more and pay smaller dividends.
Option (4) Stock market reaction – Investors, in general, view an increase in dividend as a good news. — Correct. Investors see a higher dividend as good news, so the share price tends to rise. A cut in dividend may pull the price down. Management keeps this effect on the share price in mind.
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.” “(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.” “(j) Legal Constraints: Certain provisions of the Companies Act place restrictions on payouts as dividend. Such provisions must be adhered to while declaring the dividend.” “(k) 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.” |