The manager of Montreal Trustco has noticed that as the dividend payout ratio of the firm increases the value of the firm's equity increases.This is most likely due to:
A)The firm's return on equity is lower than the required return on equity
B)The firm's return on equity is higher than the required return on equity
C)The firm's return on equity is equal to the required return on equity
D)None of the above is a likely explanation.

Question

Quizplus · Accepted Answer

If the firm's return on equity is lower than the required return on equity, retaining earnings would not generate sufficient returns, so paying out dividends would increase the firm's equity value.

The Manager of Montreal Trustco Has Noticed That as the Dividend