In which situation might a company decide to pay dividends?

A company might decide to pay dividends when there is a surplus of cash because this indicates that it has sufficient liquid resources to distribute to its shareholders without jeopardizing its operational needs or long-term financial stability. A surplus of cash suggests that the company has generated more cash than it requires for reinvestment in the business, covering operating expenses, and addressing other financial obligations.

By returning excess cash to shareholders in the form of dividends, the company not only rewards its investors but also signals financial health and profitability. This can enhance shareholder satisfaction and potentially attract more investors.

In contrast, paying dividends in other scenarios, such as when profits are low, accumulating debt, or lacking retained earnings, could indicate financial strain or mismanagement, which could threaten the company’s stability and growth potential.