Question

Assume that a company in the early stages of growth has financed itself using only a very small percentage of debt in its capital structure. It pays no dividends to its shareholders. Is this capital structure and dividend policy appropriate? Why?

Answer 1

yes. it is correct :

if a firm is in early stages of growth, taking too much of debt can be harmful to the financial health of the business because of the interest payments that has to be made becuase of debt. In the early stages the business might be suffeirng initial losses also, in such a scenario, taking too much debt can lead the company to bankruptcy.

dividends are to be paid, when a firm has extra cash and no growth opportunities. if a mature company pays dividend it is believed it is appropriate because it has already utilized all the growth opportunities available to the compnay. A comapny in its early stages has a lot of growth opportunities open so it should reinvest the surplus cash instead of distributing it as dividends. so yes it's policy is appropriate.