Asked by Katrina Kazandjian on Apr 29, 2024
Verified
A valid reason for a firm to reduce or eliminate its cash dividends is if the firm is on the verge of violating a bond restriction which requires a current ratio of 1.8 or higher.
Cash Dividends
Payments made by a corporation to its shareholders from its earnings in the form of cash.
Bond Restriction
Conditions or covenants included in a bond agreement that impose certain limitations on the issuer's actions.
Current Ratio
A liquidity ratio that measures a company's ability to pay short-term obligations using its current assets.
- Acknowledge the causes leading corporations to change their dividend policies.
Verified Answer
ZK
Zybrea KnightMay 02, 2024
Final Answer :
True
Explanation :
Reducing or eliminating cash dividends can help a firm conserve cash, thereby improving its current ratio (current assets divided by current liabilities) and avoiding the violation of bond covenants that require maintaining a certain current ratio.
Learning Objectives
- Acknowledge the causes leading corporations to change their dividend policies.