BUSINESS ADMINISTRATION
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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As a part of its capital structure, ‘Venus Ltd ‘had R.s 50 Lakh as equity share capital and a loan of R.s 20 Lakh from neon bank. On earning a good profit, Venus Ltd decided to give a good profit, Venus Ltd decided to give dividend to the equity shareholders but were surprised when the neon bank imposed restrictions on the payment of dividend.The factor affecting dividend decisions which allows neon bank to impose restrictions on the payment of dividend by Venus Ltd is ____
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contractual constraints
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Legal constraints
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Explanation:
Detailed explanation-1: -This is because debt/loan carry a fixed charge and the amount of interest paid is deductible from the earnings before tax payment. The benefit to the shareholders will be realised only if the average rate of return on total capital invested is more than the rate of interest payable on loan/debt.
Detailed explanation-2: -Capital structure refers to the combination of borrowed funds and owners’ fund that a firm uses for financing its fund requirements. Herein, borrowed funds comprise of loans, public deposits, debentures, etc. and owners’ fund comprise of preference share capital, equity share capital, retained earning etc.
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