Contracts with bondholders, other lenders, and preferred shareholders often limit dividend payments and thereby compel the retention of earnings.Which of the following is/are true?

Question

Quizplus · Accepted Answer

All of the statements are true. Bond contracts, as well as contracts with other lenders and preferred shareholders, often include provisions that limit dividend payments in order to ensure that the company has enough cash flow to meet its debt obligations. These provisions may involve curtailing dividends so that debt service payments and dividends do not exceed earnings, requiring that debt be retired with earnings, or other limitations on dividend payments. Additionally, companies are required to disclose significant limitations on dividend declarations in their financial statement notes.

Contracts with Bondholders, Other Lenders, and Preferred Shareholders Often Limit