The El Paso Current has a general dividend policy whereby the firm pays a constant annual...


The El Paso Current has a general dividend policy whereby the firm pays a constant annual dividend of $1.50 per share of common stock. The firm has 2,000 shares of stock outstanding.

The company:

a. must always show a current liability of $3,000 for dividends payable.

b. must still declare each dividend before it becomes an actual company liability.

c. is obligated to continue paying $1.50 per share per year as a dividend.

d. will be declared in default and can face bankruptcy if they do not pay at least $1.50 per year to each shareholder on a timely basis.

e. has a liability which must be paid at a later date should the company miss paying an annual dividend payment.

General and Preferred Dividends:

By their very names, it is suggested that general dividends are ordinary dividends payable only when directors declare the payouts in company's annual general meeting. Preferred dividends are however a mandatory payment like debenture interest and have to be paid out of reserves if a company is unable to pay a dividend from its current year's profit or should the company suffers a loss.

Answer and Explanation:

a. Incorrect. General dividends do not fall under the category of liability as it is a payment by choice and not an obligation

b. Correct. Merely having a constant dividend policy doesn't entitle the shareholders to expect dividend payment unless it has been declared. Dividend once declared do become an obligation for a company.

c. Incorrect. Dividends are not an obligation before they are declared.

d. Incorrect. Dividends are not declared by default but have to be declared by the board of directors in the company's annual general meeting.

e. Incorrect. As mentioned before dividends are not a liability before the declaration in the company's AGM

Learn more about this topic:

Cash Dividends & Dividend Payment

from Finance 101: Principles of Finance

Chapter 16 / Lesson 1

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