In practice, firms tend to increase their dividend
A) when the stock seems to be underpriced in the market.
B) Reducing cash to force executives to focus on efficient investment decisions.
C) only when they believe they can sustain the increased payout indefinitely.
D) when company is holding more cash than it would like.

Question

Quizplus · Accepted Answer

Firms typically increase their dividend payout only when they are confident that they can maintain the increased payout level over the long term. This is because investors expect a consistent and reliable dividend payment, and a sudden reduction or elimination of the dividend can negatively impact the firm's stock price and reputation. Increasing the dividend payout also signals that the firm is in a financially healthy position and has confidence in future cash flows.

In Practice, Firms Tend to Increase Their Dividend