Which type of firm is likely to have a high dividend payout ratio policy? a. a...
Which type of firm is likely to have a high dividend payout ratio policy?
a. a younger firm with uncertain income but significant growth opportunities
b. an older firm with steady earnings but few growth opportunities
c. an older firm with irregular income and significant growth opportunities
d. a younger firm with significant income and super normal positive growth opportunities.
Homework Answers
Answer:
Correct answer is:
b. an older firm with steady earnings but few growth opportunities
Explanation:
Older/established companies with steady earnings will often have high payout ratios. Since they have steady cash flows and few growth opportunities, they will be willing to pay higher dividends.
As such option b is correct.
A younger firm with significant income and super normal positive growth opportunities, by contrast, will often have lower payout ratios because they need to retain more of their earnings in super normal positive growth opportunities and grow their businesses. As such option d is incorrect.
Younger firms with uncertain income or older firm with irregular income but significant growth opportunities will retain earnings to invest in growth opportunities.
As such options a and c are incorrect.
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