CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

Which of the following would have an influence on the optimal dividend policy?

I. The costs associated with selling new common stock.
II. Bond indenture constraints.
III. A strong shareholders' preference for current income versus capital gains.
IV. The possibility of accelerating or delaying investment projects.
A. II, III and IV.
B. I, III and IV.
C. I, II, III and IV.
Explanation: All of these statements can have an effect on dividend policy. The optimal payout ratio is a function of 4 factors:

1. Investors' preferences for dividends versus capital gains.
2. The firm's investment opportunities.
3. The firm's target capital structure.
4. The availability and cost of external capital.

User Contributed Comments 8

User Comment
jwp2 Bond indenture constraints do not influence the optimal dividend policy. They may influence the actual dividend policy.
jason yes it does!
pjdeschenes I sounds like issuing costs.
dream007 what has selling new common stocks got to do with dividend payment?
leftcoast If you've committed to a certain fixed dividend, issuing more stock increases your dividend payout ratio.
somk leftcoast, how?
alejandroc Why does II have an influence?
darbyland II has influence because debtholders just dont want to share wealth with the sharedholders - so they put out constraints to limit the payout to the shareholders
You need to log in first to add your comment.