All else the same, an increase in a ﬁrm's dividend payout ratio will decrease its sustainable growth
rate.

Question

Quizplus · Accepted Answer

The dividend payout ratio is the percentage of earnings that a company pays out to its shareholders as dividends. When the company increases its dividend payout ratio, it retains less earnings to reinvest in the business, which leads to a decrease in the company's growth potential. Therefore, all else being equal, the sustainable growth rate will decrease with an increase in the dividend payout ratio.

All Else the Same, an Increase in a ﬁRm's Dividend