CIMAPRA19-F03-1 Exam - Topic 1 Question 10 Discussion

Question

A listed company in a high growth industry, where innovation is a key driver of success hasalways operated a residual dividend policy, resulting involatility in dividends due to periodic significant investments in research and development.

The company has recently come under pressure from some investors to change its dividend policy so that shareholders receive a consistent growing dividend. In addition, they suggested that the company should use more debt finance.

If the suggested change is made to the financial policies, which THREE of the following statements are true?

Serina · Accepted Answer

A) It may give a signal to the market that the company is entering a period of stable growth. and B) There may be a change to the shareholder profile due to'the clientele effect'. and E) The company's financial risk will increasedue to its increased use of debt finance.

Serina · Answer

C) The directors will not have to take shareholder dividend preferences into consideration in future.

Serina · Answer

D) Retained earnings have a lower cost than debt finance.