Even though dividends are cash payments, firms typically must consider both cash flow and net income when making dividend distribution decisions.

Question

Quizplus · Accepted Answer

Firms must consider both their cash flow and net income when making dividend distribution decisions because even though dividends are cash payments, they must have enough cash reserves to continue operating and investing in growth opportunities. Therefore, a firm's ability to generate sufficient cash flow is an important factor in determining the amount of dividends it can pay out. Additionally, the firm's net income is also a consideration because paying out too much in dividends could negatively impact the financial stability of the firm.

Even Though Dividends Are Cash Payments, Firms Typically Must Consider