Which one of the following is not a reason why a corporation's ability to pay dividends may be restricted?

Question

Quizplus · Accepted Answer

A corporation's ability to pay dividends may be restricted for several reasons, but not all options listed are valid reasons for such restrictions. Let's examine each option:
a. An agreement with bondholders may require that the balance of retained earnings be maintained at a minimum level.
This is a valid reason for dividend payment restrictions. Corporations often issue bonds as a form of debt financing, and bond agreements (indentures) may include covenants that restrict the company's ability to pay dividends unless certain financial conditions are met, such as maintaining a minimum level of retained earnings.
b. The board of directors may set aside designated amounts for future expansion or other business purposes.
This is also a valid reason for restricting dividend payments. The board of directors may decide to retain earnings to finance future projects, expansion, or other strategic investments rather than distribute them as dividends to shareholders.
c. State laws may require that the retained earnings balance cannot fall below the cost of treasury stock.
This is another valid reason for dividend payment restrictions. Some state laws may stipulate that dividends cannot be paid if doing so would reduce retained earnings below the cost of the company's treasury stock (stock that the company has repurchased from shareholders).
d. The corporate charter may require that transactions with nonowners be excluded from retained earnings.
This option is not a valid reason for restricting dividend payments. The corporate charter (also known as the articles of incorporation) outlines the company's structure and purpose, but it would not typically include a provision to exclude transactions with nonowners from retained earnings. Retained earnings are affected by the company's net income and dividends paid, not by transactions with nonowners.
Therefore, the correct answer is:
d. The corporate charter may require that transactions with nonowners be excluded from retained earnings. 
This is not a reason why a corporation's ability to pay dividends may be restricted.

Which One of the Following Is Not a Reason Why