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Chapter 5: Q5DQ (page 594)

Explain the relationship between a company’s growth possibilities and its dividend policy?

Short Answer

Expert verified

The higher the number of growth possibilities, the lower the residual income distributed as dividends by the company. The dividend policy is related to the investment opportunities available to the company.

Step by step solution

01

Step 1:Meaning of dividend decision

The decision made by the company regarding the distribution of its residual income as a dividend is called a dividend decision.This decision involves the management deciding if they want to distribute dividends and the amount of dividends to be distributed.

02

Relationship between growth possibilities and dividend policy of a company

The number of growth possibilities available to a company justifies its requirement to invest its profits.The company would prefer to reinvest its internal funds rather than taking investments from outside sources to take advantage of growth opportunities.

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