Chartered Financial Analyst Level 2

Explanation

An increase in profitable investment opportunities is most likely to decrease the dividend payout ratio because:

• Companies with more positive NPV projects will retain more earnings to fund these investments
• This follows the residual dividend policy where dividends are paid from earnings left after funding all positive NPV projects
• Higher investment opportunities increase the opportunity cost of paying dividends

Other options:

• Decrease in flotation costs makes external financing cheaper, potentially allowing higher dividends
• Decrease in earnings volatility typically allows for higher and more stable dividends

This reflects the pecking order theory where companies prefer internal financing for investments.