If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested,the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

Question

Quizplus · Accepted Answer

This is true,because if the company retains its earnings rather than paying them out,investors should receive capital gains rather than dividend income,and the taxes on those gains will be deferred until the stock is sold.Note that the money will be reinvested by the company in either case,so the risk to stockholders under dividend reinvestment and retained earnings should be the same.

If a Firm Pays Out All of Its Earnings as Dividends