The board of directors of pilgrim company authorizes a $100,000 restriction of retained earnings for a future plant expansion. this action will

Question

Solomon Moreno

Business

1 October, 15:03

The board of directors of pilgrim company authorizes a $100,000 restriction of retained earnings for a future plant expansion. this action will

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Answers (1)

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Golden · Answer 1

It will reduce the amount of dividiends it can pay.

Explanation:

As there is an amount of the retained earnings that is restricted the company cannot use them to pay up neither stock or cash dividends in the future.

The retained earnings are used to pay dividends but also, are part of the equity of the firm thus the RE count to the capital structure of the company. Loans can be obtained with better rates if thecapital structure is more based on equiy than in liabilities thus, the board of directors is planning ahead the future plant exansion avoiding to use cash and deteriorate his capital structure to pay up dividends.