CBSE 2026 · Region 4 · Set 1 · Q33

‘Quality Foods Ltd.’, a company manufacturing packaged snacks has

been in business for the last $\displaystyle 10$ years. It enjoys a good reputation and has

a loyal customer base. This financial year, the profits of the company

increased manifold as the company introduced a new range of baked

snacks that became very popular. As the year came to an end, the

company had to decide how much dividend to pay to its shareholders. In

view of the above and with the understanding that investors, in general,

view an increase in dividend as good news and stock prices react

positively to it, the Board of Directors were keen on declaring a high

dividend. However, the Chief Finance Officer of the company pointed out

that they need to keep many considerations in mind before declaring

dividend. He drew the attention of the Board of Directors to the loan that

the company has taken, containing a clause that imposes restriction on

the payment of dividend. Further, he pointed out that even though the

profits were high, a large amount of money was tied to the amounts

receivables from the debtors. Without enough cash in hand, announcing a

high dividend may not be practical. He also reminded the Board of

Directors that ‘Quality Foods Ltd.’ was planning to expand into the

breakfast cereal market. Since this new project will require a huge

investment, the company will need to retain more money out of their

earnings to finance it.

(a)

Identify and explain any two factors affecting dividend decision

(a)

that would have influenced the decision of the Board of Directors

(a)

to pay a high dividend.

(b)

Identify and explain any two factors to which the Chief Finance

(b)

Officer drew the attention of the Board of Directors.