A firm's investment opportunity is a major factor when deciding its dividend policy.

Question

Quizplus · Accepted Answer

A firm's investment opportunity will affect its ability to generate future earnings and cash flows, which will in turn impact its ability to pay dividends. If the firm has profitable investment opportunities that require significant cash outflows, it may choose to retain earnings and reinvest them in the business rather than paying dividends to shareholders. On the other hand, if the firm has few attractive investment opportunities or is in a mature industry with limited growth prospects, it may choose to distribute more of its earnings to shareholders in the form of dividends. Therefore, investment opportunities are an important consideration when deciding a company's dividend policy.

A Firm's Investment Opportunity Is a Major Factor When Deciding