CIMAPRA19-F03-1 Exam - Topic 1 Question 8 Discussion

Question

The Board of Directors of a listed company is considering the company's dividend/retentions policy.

The inflation rate in the economy is currently high and is expected to remain so for the foreseeable future.

The board are unsure what impact the high level of inflation might have on the dividend policy.

Which THREE of the following statements are true?

Evangelina · Accepted Answer

B) Consideration should be given to the fact that shareholders will have a desire for real growth in dividend. and C) Retained earnings for reinvestment will have to earn a return in excess of the inflation level. and D) The impact of inflation on the cash flows should be considered when formulating the dividend policy.

Evangelina · Answer

A) The high inflation rate does not need to be considered when determining the dividend policy.

Evangelina · Answer

E) In periods of high inflation 100% of earnings should always be paid out as dividends so that shareholders can protect their wealth against the impact of inflation.