On the basis of historical relationships between its balance sheet items and its sales, profit margin, and dividend policy, Thode Corporation's analysts have graphed the relationship of additional funds needed (on the Y-axis) to possible growth rates in sales (on the X-axis). If Thode decides to increase the percentage of earnings paid out as dividends, which of the following changes would occur in the graph?
A) The line would shift to the right.
B) The line would pass through the origin.
C) The line would shift to the left.
D) The slope coefficient would fall.
E) The slope coefficient would increase.

Question

Quizplus · Accepted Answer

Increasing the percentage of earnings paid out as dividends indicates that Thode Corporation will retain fewer earnings to reinvest in the business. Therefore, it will need more additional funds to sustain the same level of growth. This will lead to an increase in the additional funds needed for every level of growth, resulting in the line shifting to the left on the graph.

On the Basis of Historical Relationships Between Its Balance Sheet