Chartered Financial Analyst Level 2
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- All else being equal, a dividend increase would be most appropriate for which of the following companies?
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A
A fast-growing tech company
B
A profitable company with only a few positive NPV projects
C
A company with volatile earnings that has posted strong profits in the current year
Explanation:
Explanation
A profitable company with only a few positive NPV projects is the most appropriate candidate for a dividend increase because:
- The company generates profits but has limited investment opportunities
- Returning excess cash to shareholders through dividends reduces agency costs
- This aligns with the mature company profile in the corporate life cycle
Other options:
- Fast-growing tech company should retain earnings to fund growth opportunities
- Company with volatile earnings should maintain conservative dividend policy to avoid future cuts
This follows the residual dividend policy where dividends are paid from earnings not needed for investments.
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