If a firm follows a low-investment-rate plan (applies a low plowback ratio), its dividends will be _______ now and _______ in the future than a firm that follows a high-reinvestment-rate plan.

Question

Quizplus · Accepted Answer

A low-investment-rate plan means the firm is retaining a smaller portion of its earnings for reinvestment, leading to higher dividends now due to the larger payout. However, this results in lower future dividends compared to a high-reinvestment-rate plan, as less reinvestment leads to slower growth.

If a Firm Follows a Low-Investment-Rate Plan (Applies a Low