Which of the following are valid reasons for a ﬁrm to reduce or eliminate its cash dividends? I. The ﬁrm is on the verge of violating a bond restriction which requires a current ratio of 1.8 or
Higher.
II) A ﬁrm has just received a patent on a new product for which there is strong market demand and
It needs the funds to bring the product to the marketplace.
III) The ﬁrm can raise new capital easily at a very low cost.
IV) The tax laws have recently changed such that dividends are taxed at an investor's marginal rate
While capital gains are tax exempt.

Question

Quizplus · Accepted Answer

I is a valid reason as the firm needs to maintain the current ratio to meet bond restrictions, which can result in default if not met.
II is a valid reason as the firm needs funds for the development and launch of a new product with strong market demand, which can generate higher profits in the long run.
III is a valid reason as the firm can raise new capital easily at a lower cost than distributing dividends, which can help in financing growth opportunities and increasing shareholder value.
IV is a valid reason as the tax laws have changed to a disadvantageous position for dividend payments, which can result in an increased tax burden for investors and reduced demand for the firm's shares.

Which of the Following Are Valid Reasons for a ﬁRm