Question

bond indentures or state law place restrictions that often limit dividend distribution under certain circumstances, such as low liquidity, to ensure that the cash exists to service the?

Answer 1

Bond Indentures may limit dividend distribution if earnings of the company are less than the amount specified. When a company pays dividends its equity reduces and it may face problems to service its debts.

There are Statuotry restrictions that prevents the organisation to pay dividends if

• Liabilities of the company exceeds the assets
• Amount of Dividend is greater than the retained earnings of the company or,
• Dividend is being paid from the invested capital of the firm

Moreover the debt and prefferred stock contracts may contain clause that no dividend would be paid from the earnings of the company unless debts are serviced first.

The company also needs to ensure that it has sufficent working capital to faciliate day to day operations. If the company has not paid preferred dividends that it may restrict common dividend payment.