Question

‘Companies are required to ensure that the dividend does not violate the terms of loan agreement.’ Identify the relevant factor affecting dividend decisions being discussed above.

Options

• Access to capital market

• Legal constraints

• Stock market reaction

• Contractual constraints

Answer 1

Contractual constraints

Explanation:

When companies borrow funds, they often enter into loan agreements that include specific conditions or restrictions; for example, limiting the amount of dividend they can distribute until the loan is repaid. These are known as contractual constraints, as they arise from contracts made with lenders or creditors. Therefore, the factor affecting dividend decisions in this case is contractual constraints.