The exact estimate of future dividends depends on the outlook for ________ and the firm's ________.
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A. B. C. D.B
The exact estimate of future dividends depends on the outlook for earnings growth and the firm's dividend policy.
The correct answer is B. earnings growth; dividend policy.
In order to estimate future dividends, two key factors need to be considered: earnings growth and dividend policy.
Earnings Growth: The outlook for earnings growth is crucial because dividends are typically paid out of a company's earnings. If a company's earnings are expected to increase in the future, it provides a stronger foundation for the payment of dividends. Higher earnings can support larger dividend payments. Conversely, if a company's earnings are expected to decline or remain stagnant, it may have a negative impact on future dividend payments.
Dividend Policy: The firm's dividend policy also plays a significant role in determining future dividends. Dividend policy refers to the decision-making process and guidelines set by a company's management regarding the distribution of dividends to shareholders. It includes factors such as the target payout ratio (the percentage of earnings distributed as dividends), the frequency of dividend payments, and the stability of dividend payments over time. A company with a more generous dividend policy, such as a higher payout ratio or regular dividend increases, is more likely to provide higher future dividends.
Option A (earnings; sales) is incorrect because while earnings are an essential component in estimating future dividends, sales alone do not directly determine dividend payments. Sales represent a company's revenue, but dividends are based on earnings, which are the profits remaining after deducting expenses from revenue.
Option C (stock price; dividend policy) is incorrect because while stock price may indirectly impact dividend policy (as a higher stock price may indicate a stronger market valuation and more investor demand), it does not directly affect the estimation of future dividends.
Option D (sales price; earnings) is incorrect because sales price is not directly related to dividend estimation. Sales price typically refers to the price at which goods or services are sold, and it is not a factor in determining future dividends. Earnings, on the other hand, are relevant because they provide the basis for dividend calculations.
Therefore, the most accurate answer is B. earnings growth; dividend policy, as these factors have a direct impact on the estimation of future dividends.