Asked by Micaila Reinschild on May 04, 2024
Verified
If a firm does not pay dividends, what is true about the components of the sustainable growth rate?
A) The dividend payout ratio is 100%.
B) The retention ratio is 100%.
C) ROE does not equal the sustainable growth rate.
D) ROS is higher than if the firm did pay some dividends.
Dividend Payout Ratio
The fraction of net income a firm pays to its stockholders in dividends, expressed as a percentage of the company's total earnings.
Retention Ratio
The proportion of earnings kept back in a company to reinvest, rather than being paid out as dividends.
Sustainable Growth Rate
The maximum rate at which a company can grow its sales, earnings, and dividends without having to increase debt or equity financing.
- Analyze the implications of dividend policies on a company's growth and financing strategies.
Verified Answer
ZK
Zybrea KnightMay 04, 2024
Final Answer :
B
Explanation :
If a firm does not pay dividends, then the entire profit is retained by the firm and the dividend payout ratio becomes 0%. Therefore, the retention ratio becomes 100%. ROE would still equal the sustainable growth rate because the retention ratio has increased to compensate for the lack of dividends. ROS could be higher, lower or unchanged depending on the specifics of the firm's operations.
Learning Objectives
- Analyze the implications of dividend policies on a company's growth and financing strategies.