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

Question

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The sustainable growth rate is calculated as the return on equity (ROE) multiplied by the retention ratio (1 - dividend payout ratio). Increasing the dividend payout ratio decreases the retention ratio, thus reducing the amount of earnings retained and reinvested in the firm, leading to a lower sustainable growth rate.

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