A valid reason for a firm to reduce or eliminate its cash dividends is if the firm is on the verge of violating a bond restriction which requires a current ratio of 1.8 or higher.

Question

Quizplus · Accepted Answer

Reducing or eliminating cash dividends can help a firm conserve cash, thereby improving its current ratio (current assets divided by current liabilities) and avoiding the violation of bond covenants that require maintaining a certain current ratio.

A Valid Reason for a Firm to Reduce or Eliminate