Question

"Restrictions on dividend payments based on the liquidity postion of the firm."

Based on your understanding of constraints on dividend payments, identify the type of constraint this condition represents. Assume that all other factors held constant.

A. availability of cash B. Impairment of capital rule C. Penalty tax

Answer 1

Dividend can be distributed when the Company is running in profits but dividend mostly happens to be in cash, so here comes the concept of liquidity.

Liquidity represents Cash position of the Company. Company might be requiring cash for different things like Expansion, Growing Working Capital needs, Capital Expenditure. Having said that, Even Company growing at a higher growth may not have good Cash Position as it needs to look after above said things. So if cash is not available for Dividends, Company may end up issuing bonus shares as dividend.

if the Company Pays dividend in cash then it has to look for External sources of funding for Working capital, Capital Expenditure requirements and other Cash Requirements. Getting External sources is also not that easy as the company has to satisfy many T&C's and also certain key Financial ratios imposed by Banks, Financial Institutions.

So Overall Dividend in not just an Independent factor. It is Very dependent in such a way that its impact is very significant to Business.