Which of the following is likely to reduce ‘capital growth’? Select all that apply.

Which of the following is likely to reduce ‘capital growth’? Select all that apply.
A . Increased sales
B . Payment of high salaries and large allowances to senior managers
C . Payment of dividends
D . Increased profit

View Answer

Answer: B, C

Explanation:

Payment of high salaries and large allowances, may, fairly obviously reduce the amount of profit which can be retained for capital growth. If money is being distributed in this way, it isn’t being retained.

A profitable company has a choice: to pay dividends to a greater or lesser extent; or retain some of its profits to a greater or lesser extent in the form of retained capital – capital growth.

Increased sales and increased profit may result in increased capital growth, all other things being equal, depending on the firm’s dividend policy.