35 points here The company ABC made a net profit of €5.0 million, although announced a
dividend payment of €7.0 million. The company is in an investment cycle and
has a significant level of debt.

Is this correct or not? and why

Not correct

Explanation:

The profits of a business are either shared among its shareholders or retained for further re-investment. Retained profits remain in the company accounts as reserves until a suitable investment opportunity arises. If a business has accumulated reserves for several periods, and no investment opportunity is forthcoming, the management distributes the reserves together with dividends.

Company ABC made a profit of €5.0 million but declared dividends of €7.0 million. The extra €2.0 million must have come from the company's reserves. Company ABC must have had some retained earning, which it did not manage to invest. The retained earnings represent excess cash being held by the business, which means company ABC is not in debt. It is not in an investment cycle either; otherwise, it would have used its retained earnings.

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