Asked by matthew winter on Jun 05, 2024
Verified
If a firm follows a low-investment-rate plan (applies a low plowback ratio) , its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan.
A) higher; higher
B) lower; lower
C) lower; higher
D) higher; lower
E) It is not possible to tell.
Plowback Ratio
The proportion of earnings retained by a company after dividends have been paid out to shareholders.
Low-investment-rate Plan
A strategy or plan offering lower returns on investments, typically associated with lower risk or short-term investment horizons.
Dividends
Payments made by a corporation to its shareholder members from the company‘s earnings.
- Compute the expected rate of increase for a company by utilizing its Return on Equity (ROE) and the ratio of dividends paid out.
- Examine the effect of fluctuating growth rates on dividend distribution and the valuation of stocks.
Verified Answer
DN
Dayang NurzawanieJun 11, 2024
Final Answer :
D
Explanation :
A low-investment-rate plan means the firm retains a smaller portion of its earnings for reinvestment, leading to higher dividends now due to the larger payout. However, because less is reinvested, future growth and thus future dividends are likely to be lower compared to a firm that reinvests more heavily.
Learning Objectives
- Compute the expected rate of increase for a company by utilizing its Return on Equity (ROE) and the ratio of dividends paid out.
- Examine the effect of fluctuating growth rates on dividend distribution and the valuation of stocks.