The dividend decisions can significantly affect the firm's share price and external financing requirements.

Question

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Dividend decisions can affect a firm's share price as investors often perceive higher dividend payouts positively, leading to an increase in share price. Additionally, a firm's dividend policy can impact its external financing requirements as retained earnings can be used to fund investments and growth rather than relying on outside financing sources. Conversely, lower dividend payouts may cause a decrease in share price and may require the firm to seek external financing to fund investments and operations.

The Dividend Decisions Can Significantly Affect the Firm's Share Price