Boards 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 the declaration of dividends would create a situation of insolvency, the board of directors may be legally restricted from doing so. This is because, in such a scenario, the company wouldn't have enough funds to meet its obligations and pay off its debts. As a result, the board of directors must act in the best interests of the company and its shareholders by avoiding insolvency.

Boards of Directors May Be Legally Restricted in Their Declaration