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Explanation:

Option C is the best constraint because:

Setting minimum EBITDA coverage ratios as a condition for dividends forces management to maintain financial discipline
This creates a direct link between dividend payments and financial health metrics
It prevents management from paying dividends when the company's ability to service debt is weak, thereby limiting funds available for negative NPV projects

Stock dividends (Option A) don't reduce cash available for investment. Cash dividends (Option B) reduce cash but don't directly tie to financial health metrics like EBITDA coverage.

Explanation:

Option C is the best constraint because:

Setting minimum EBITDA coverage ratios as a condition for dividends forces management to maintain financial discipline
This creates a direct link between dividend payments and financial health metrics
It prevents management from paying dividends when the company's ability to service debt is weak, thereby limiting funds available for negative NPV projects

Stock dividends (Option A) don't reduce cash available for investment. Cash dividends (Option B) reduce cash but don't directly tie to financial health metrics like EBITDA coverage.

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Which of the following would best constrain management's ability to overinvest by taking on negative NPV projects?

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Last updated: January 16, 2026 at 14:03

Increase stock dividends

0.0%

Increase internally financed cash dividends

50.0%

Set minimum levels of EBITDA coverage of interest charges as a condition for paying dividends

50.0%