A firm maintains a constant dividend payout ratio of 0.45.What must the plowback ratio be?
A) 1 + 0.45
B) 1 - 0.45
C) 1 × 0.45
D) 1 / 0.45
E) 0.45

Question

Quizplus · Accepted Answer

Plowback ratio is the ratio of earnings retained by the firm to the total earnings. Since the firm has a constant dividend payout ratio of 0.45, the remainder of earnings (1-0.45) will be plowed back and reinvested in the firm. Therefore, the plowback ratio is 1-0.45 = 0.55. Option B is the correct answer.

A Firm Maintains a Constant Dividend Payout Ratio of 0