What effect does a firm’s dividend payout ratio have on its sustainable growth rate? In particular,...
What effect does a firm’s dividend payout ratio have on its sustainable growth rate? In particular, explain how dividends (arguably,the last line on the income statement as they are subtracted from net income to calculate additions to retained earnings) relates to sales (the top line of the income statement).
Homework Answers
Sustainable growth rate = ROE * Earnings retention ratio
Higher the dividend payout ratio lower is the retention ratio. Hence the sustainable growth rate is lower.
Higher the sales, higher will be the net income and hence higher will be the dividends. With increase in net income, the profits available for the shareholders will be higher.
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