Dividend policy can help a firm maintain a desired capital structure.

Question

Quizplus · Accepted Answer

Dividend policy is an integral part of a company's capital structure management. By paying dividends or retaining earnings, a company can influence the mix of debt and equity in its capital structure. A company that desires a certain debt-to-equity ratio may choose to retain earnings and reinvest in the business, rather than paying dividends. Alternatively, a company with excess cash may choose to pay out dividends to shareholders to reduce its cash holdings and leverage. Therefore, dividend policy can help a firm maintain a desired capital structure.

Dividend Policy Can Help a Firm Maintain a Desired Capital