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

Reducing dividends can help maintain the current ratio to avoid bond covenant violations (I) and provide funds for new product development (II). Tax changes making dividends less favorable compared to capital gains (IV) also justify reducing dividends. However, if capital can be raised easily and cheaply (III), there is less need to cut dividends.

Which of the Following Are Valid Reasons for a Firm