Question

11.

Your executive team wants to cut the dividend this year because there has been a temporary drop in earnings. Everyone expects that earnings will be back to normal next year. What should the team consider before making a final decision?

Select one:

a. The team should consider the dividend payout ratio.

b. The team should consider the possibility that the dividend cut will be viewed as a negative signal regarding the longer term cash flow of the company, when in fact earnings are expected to rebound next year.

c. The team should consider the actions of others in the same industry.

d. The team should consider the benefits of share buybacks vis-a-vis dividend payouts.

e. The team should consider the timing of the dividend announcement.

Answer 1

Answer:

Option b: The team should consider the possibility that the dividend cut....

Explanation:

If the company has lower earnings in the current period, and the dividend is reduced, this will give a negative view to the stakeholders of the company. This is the major consideration to be taken into account by the management before taking the decision.

The dividend payout ratio, timing of dividend announcement are not so important as above.

Also, actions of others in the same industry may not be so important to the stakeholders but the dividend cut decision may impact the company negatively in long term.

Hence, option 'b' is correct and rest all are incorrect.

In case of any doubt or clarification, feel free to come back via comments.