(i) A firm with a large proportion of high income individuals will pay low or no dividends. Such
shareholders prefer high capital to reduce their tax burden since capital gains in Kenya are
tax exempt.
(ii) A growth company with abundance of good investment opportunities.
Such a firm would pay low and retain more profits to finance its good
investment opportunities.
(iii) A company with ordinary growth and high liquidity.
Such a firm could pay high dividends and retain less. With high liquidity and much unused
debt capacity, the firm can easily borrow debt capital to achieve optimal debt capital. It has
access to capital markets.
(iv) A dividend paying company that experiences an unexpected drop in earnings from
trend. Such a firm would pay medium dividends but if the drop in earnings persist in
future it should adopt payment of low dividends.
(v) A company with volatile earnings an high business risk.
This firm should pay low dividends and retain more profits to finance its investments. With
high business risk, the firm does not have access to capital markets and it is difficult to raise
secure debt capital which would nevertheless increase the financial risk of the firm.
Kavungya answered the question on April 16, 2021 at 13:46