Given a set investment policy and capital structure,then payout policy is a trade-off between ___________ and ___________.
A) retained earnings; borrowing
B) capital budgeting; cash dividends
C) cash dividends; stock issues and repurchases
D) stock splits; stock dividends

Question

Quizplus · Accepted Answer

Payout policy determines how much of the company's earnings will be distributed to shareholders as cash dividends or through stock issues and repurchases. This is a trade-off between providing current income to shareholders and retaining earnings for future investment opportunities. Retaining earnings increases the company's ability to fund future growth opportunities without relying on external financing, while paying out dividends reduces the amount of cash available for reinvestment. Similarly, issuing new stock dilutes existing shareholders' ownership and reduces earnings per share, while repurchasing shares increases earnings per share but reduces the amount of cash available for other investments. Therefore, the payout policy should be carefully balanced to maximize shareholder value while maintaining adequate financial flexibility for future growth. Choice C is the only option that correctly represents this trade-off.

Given a Set Investment Policy and Capital Structure,then Payout Policy