Factors Influencing Dividend Policy Legal rules n Capital Impairment Rule -many states prohibit the payment of dividends if these dividends impair capital (usually either par value of common stock or par plus additional paid-in capital) n Insolvency Rule - some states prohibit the payment of cash dividends if the company is insolvent under either a fair market valuation or equitable sense o Undue Retention of Earnings Rule-- prohibits the undue retention of earnings in excess of the present and future investment needs of the firm 18-1318-13 Factors Influencing Dividend Policy Capital Impairment Rule -- many states prohibit the payment of dividends if these dividends impair Capital (usually either par value of common stock or par plus additional paid-in capital). Insolvency Rule -- some states prohibit the payment of cash dividends if the company is insolvent under either a fair market valuation or equitable sense. Undue Retention of Earnings Rule -- prohibits the undue retention of earnings in excess of the present and future investment needs of the firm. Legal Rules