Which of the following changes will provide an increase (if only in the short-run) in a firm's ROE?
A)An increase in total assets
B)An increase in the dividend-payout ratio
C)An increase in equity
D)The payment of a stock dividend

Question

Quizplus · Accepted Answer

An increase in the dividend-payout ratio will lower the amount of retained earnings and increase the amount of dividends paid out to shareholders. This will reduce the equity on the balance sheet and increase the return on equity (ROE) in the short-run. However, this increase may not be sustainable if the company is not reinvesting enough earnings to maintain or grow its earnings base.

Note: A, C, and D may not necessarily result in an increase in ROE. Increasing total assets (A) could decrease ROE if the increase in assets does not generate sufficient earnings to offset the increase in equity. Likewise, an increase in equity (C) or the payment of a stock dividend (D) will not necessarily result in an increase in ROE unless there is a corresponding increase in earnings to support the higher equity base.

Which of the Following Changes Will Provide an Increase (If