Question

Dividend is an obligation to be paid by a company every year.

Hint:

Remember: {Interest} is a legal {obligation} (cost of debt). {Dividend} is a board {discretion} (sharing of profit).

Answer 1

Step 1: Distinguish between dividend and interest. Dividend is a distribution of a portion of a company's earnings, decided by the Board of Directors, to a class of its shareholders. It is not an obligation and depends on the company's profitability and policy. Interest is the cost of borrowing money. It is a charge against profit and a legal obligation that must be paid to lenders (like bondholders or banks) regardless of whether the company makes a profit. Step 2: Identify the obligatory payment. The payment that is a mandatory obligation is interest on debt.