Asked by Katherine Fortune on Jun 29, 2024
Verified
Which one of the following statements is correct concerning the external financing need (EFN) and the dividend payout ratio? Assume EFN is a positive number.
A) The dividend payout ratio has no effect on the EFN.
B) An increase in the dividend payout ratio will decrease the EFN.
C) An increase in the dividend payout ratio will increase the EFN.
D) The effect on EFN caused by an increase in the dividend payout ratio cannot be predicted.
E) An increase in EFN causes the dividend payout ratio to decrease.
External Financing Need
External financing need is the amount of funding a business requires from sources outside its operations, such as loans or investor capital, to finance its activities or growth.
Dividend Payout Ratio
A financial measurement that calculates the percentage of earnings distributed to shareholders in the form of dividends.
Predicted
Anticipated or expected based on current trends or data analysis.
- Define the connection that exists among the sources of external financing, dividend allocation policies, and rates of sustainable expansion.
Verified Answer
IH
ibrahim hossenJun 30, 2024
Final Answer :
C
Explanation :
An increase in the dividend payout ratio means that the company is distributing more of its earnings as dividends to its shareholders, leaving less retained earnings to be reinvested in the business. This would increase the company's external financing needs (EFN) to support its growth or operational requirements, as it has less internal funds to use.
Learning Objectives
- Define the connection that exists among the sources of external financing, dividend allocation policies, and rates of sustainable expansion.