Question

A company should take a look on all of the following issues before starting to pay dividends or repurchase shares except:

Select one:

a. Is it likely to have enough cash to invest in future projects

b. If competitors are paying out dividends

c. If the debt ratio is too high

d. Does it hold enough cash needed for possible unexpected events

Answer 1

Answer:

Option (b) is the correct answer.

Reason:

If company want to pay dividend or repurchase of shares company should take consideration of the following issues:

• Is it likely to have enough cash to invest in future projects
• Does it hold enough cash needed for possible unexpected events

In both the situation if the company does not consider this company may facing financial issues in operation & expansion of business & it will impact inversely to the company.

• If the debt ratio is too high & the company is considering paying a dividend or wants to repurchase share in such a case company will unable to meet its debt coverage ration & which leads to creating the wrong image of the company in the stakeholders.

  Accordingly, all three statements are correct.

• If competitors are paying out dividends in such case company need to check their resources & if possible may distribute a dividend to get an edge in the competition & create faith among the shareholders but it is not necessary to check whether the competitor is paying a dividend or not.

Accordingly Option (B) is correct answer.