Question

‘Mudro Infratech’ got a short-term contract for building two villas within a period of ten months with the expectation to earn a huge amount of profit. The profit of the company went up by 40% due to this temporary order. The Finance Manager knew that this was not a regular or sustainable source of income. So, he decided not to increase dividend per share. The factor affecting Dividend Decision being highlighted above is:

• A. Cash flow position
• B. Shareholders’ preference
• C. Growth opportunities
• D. Stability of dividends

Hint:

Companies often maintain stable dividends to build investor confidence, especially when profits are volatile.

Answer 1

The Correct Option is D

The company experienced a temporary spike in profits, which the Finance Manager knew was not sustainable. So, he chose not to increase dividends, maintaining a stable payout. This reflects the principle of stability of dividends, where companies prefer to keep dividend payments consistent over time rather than fluctuating with temporary profit changes. 
Why the other options are incorrect:

• (A) Cash flow position: No mention of cash availability.
• (B) Shareholders’ preference: Not discussed in the case.
• (C) Growth opportunities: Not the reason for dividend restraint.

Final Answer: (D) Stability of dividends