A company will tend to pay lower rate of dividend if -

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Restrictive clauses imposed by lender, low access to capital market, falling short of cash, good growth opportunities available.

Option (1) Lower amount of earnings, stable earning, potentials, no shortage of cash, easy access to capital market — Incorrect. Stable earnings, no shortage of cash and easy access to the capital market all allow a higher dividend. So the company will not pay a lower rate.
Option (2) Restrictive clauses imposed by lender, low access to capital market, falling short of cash, good growth opportunities available. — Correct. Every point leads to a lower dividend. The lender’s restrictions limit dividend, low access to the market means the company depends on retained earnings, a short cash position cannot pay dividend, and good growth opportunities need the profits to be kept in the business.
Option (3) Short of cash, good growth opportunities available, low access to capital market, enjoys stable earnings — Incorrect. The first three points lower the dividend, but stable earnings allow a higher dividend. So not every point fits.
Option (4) Unstable earnings, falling short on cash, easy access to capital market, lower amount of earning — Incorrect. Easy access to the capital market allows a higher dividend, so not every point fits.

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.”

“(d) Growth Opportunities: Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. The dividend in growth companies is, therefore, smaller, than that in the non-growth companies.”

“(e) 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.”

“(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.”

“(k) Contractual Constraints: While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. …”

A company will tend to pay lower rate of dividend if -

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Restrictive clauses imposed by lender, low access to capital market, falling short of cash, good growth opportunities available.

Option (1) Lower amount of earnings, stable earning, potentials, no shortage of cash, easy access to capital market — Incorrect. Stable earnings, no shortage of cash and easy access to the capital market all allow a higher dividend. So the company will not pay a lower rate.
Option (2) Restrictive clauses imposed by lender, low access to capital market, falling short of cash, good growth opportunities available. — Correct. Every point leads to a lower dividend. The lender’s restrictions limit dividend, low access to the market means the company depends on retained earnings, a short cash position cannot pay dividend, and good growth opportunities need the profits to be kept in the business.
Option (3) Short of cash, good growth opportunities available, low access to capital market, enjoys stable earnings — Incorrect. The first three points lower the dividend, but stable earnings allow a higher dividend. So not every point fits.
Option (4) Unstable earnings, falling short on cash, easy access to capital market, lower amount of earning — Incorrect. Easy access to the capital market allows a higher dividend, so not every point fits.

“(k) Contractual Constraints: While granting loans to a company, sometimes the lender may impose certain restrictions on the payment of dividends in future. …”