Board of directors may be legally restricted in their declaration of dividends if:
A)the cash must be borrowed for the dividend payment.
B)dividends have increased substantially over a short period of time.
C)the dividend would create a situation of insolvency.
D)the stock is selling at a low relative price.

Question

Quizplus · Accepted Answer

If declaring a dividend would create a situation of insolvency for the company, then the board of directors is legally restricted from declaring the dividend. This is because it would be irresponsible to pay out dividends when the company may not have enough funds to meet its other financial obligations.

Board of Directors May Be Legally Restricted in Their Declaration