Answer:
The correct answer is option (a)
Explanation:
From the given question below, we recall recall the following statements.
A firm has an ROE of =12%
In the firm the stakeholders desire a dividend yield of=
A capital gain yield = 4%
Now,
If it slashes it's dividend payout , the per share dividend will reduce with every other conditions remaining that will remain permanent, that will result in price decrease
For example :D(before change) =1 ,g=8% ,D(After change) :.80
Thus,
The before Price : 1/(.12-.08)= $25
The price after :.80/(.12-.08)= $ 20 per share
so condition II is not feasible
The condition III:with will reduce in price PE will also decrease
The condition or situation I:there will be a change in dividend payout ,ratio of retention will increase as there will be in increase in growth rate.
For this therefore, The option a is correct
Answer:
All else equal, the firm's growth rate will accelerate after the payout change
Explanation:
1 dollar of equity generates 12 cent of earnigns
dividend yield 4% -> dividends / Price = 1
capital gain 9% --> Price in one year / current price - 1 = 0.09
Given this fact we can say:
Current Year Dividends is 4 cent and price is 1 dollar
Year 1:
Price is 1.09 and dividend 0.0436
Year 2:
Price is 1.0981 and dividend 0,04823
If the dividend payout ratio did not decrease there will be less earnings retained to sustain the grow to achieve this price yields therefore the first statement is true
