Dividend Test

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Dividend Test

A provision in some lending agreements where the borrower is a company that forbids or restricts the borrower's ability to make dividends payments to shareholders. That is, the dividend test may place a limit on the company's earnings that may be distributed as dividends. Obviously, the dividend test works to the detriment of shareholders, but it improves the lender's likelihood of being repaid because it increases the resources the borrower had to service debt.

dividend test

A provision in some borrowing agreements that restricts the borrower's ability to pay dividends to stockholders. This provision is supposed to protect the position of creditors against a drawdown on assets by dividend payments.

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