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Business Studies · 2026 · 6 marks
CBSE 2026 · Region 4 · Set 1 · Q33
‘Quality Foods Ltd.’, a company manufacturing packaged snacks has been in business for the last 10 years. It enjoys a good reputation and has a loyal…
‘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
that would have influenced the decision of the Board of Directors
to pay a high dividend.
(b)
Identify and explain any two factors to which the Chief Finance
Officer drew the attention of the Board of Directors.
Marking-scheme solution
(a)
Two factors affecting dividend decision that would have influenced the
decision of the Board of Directors to pay a high dividend are:
• (i) Amount of Earnings:
• Dividends are paid out of current and past earnings.
Therefore, earnings is a major determinant of the decision about
dividend.
• (ii) Stock Market Reaction:
Investors, generally, view an increase in dividend as a good news and
• stock prices react positively to it.
A decrease in dividend may have a negative impact on the share
prices in the stock market.
(b)
Two factors to which the Chief Finance Officer drew the attention of the
Board of Directors are:
(i)
Contractual Constraints:
The companies are required to ensure that the dividend does not violate the
terms of the loan agreement which may impose restrictions on payment of
dividend in future.
(ii)
Cash Flow Position:
The payment of dividend involves an outflow of cash. Availability of enough
cash in the company is necessary for declaration of dividend.
(iii)
Growth Opportunities:
The dividend in growth companies is smaller than that in the non growth
companies because companies having good growth opportunities retain more
money out of their earnings so as to finance the required investment.
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CBSE Class 12 Business Studies past-paper question from the 2026 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.