The primary purpose of laws prohibiting a firm from paying dividends that include its legal capital is to:
A) reduce investors' tax liability.
B) ensure that the balance sheet balances.
C) prevent managers from paying out all the firm's assets.
D)prevent managers from paying large dividends.

Question

Quizplus · Accepted Answer

The purpose of laws prohibiting a firm from paying dividends that include its legal capital is to prevent managers from paying out all the firm's assets. Legal capital is the minimum amount of capital that a company must maintain in order to protect its creditors, so paying it out as dividends can leave the company vulnerable to insolvency and defaulting on its debts. By prohibiting the payment of dividends that include legal capital, these laws ensure that managers cannot deplete the company's assets in this way.

The Primary Purpose of Laws Prohibiting a Firm from Paying