question_answer

Dividends declared by the companies are taken as a positive note by the investors. Stock markets react positively to such decisions and share prices tend to show an upward trend. But, at the same time, it is restricted to certain extent by the Companies Act as well as the financial condition of the concern. Franco, the financial manager of Sunlight Ltd declared in the Annual General Meeting (AGM) that "It is costly to reinvest the retained earnings." After considering his statement, what decision is taken by the board?

Answer:

Company's net earnings are divided into two parts: retained earnings and dividend. If the company has profitable investment options then, it would like to retain the earnings and reinvest rather than distribute it as dividend. But in the given case, the condition is not favourable for reinvesting. Thus, the board may take the residual decision which means the company will pay dividends as the reinvestment is not profitable.