A firm that has an ROE of 12% is considering cutting its dividend payout. The shareholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statement(s) is/are correct?
I. All else equal, the firm's growth rate will accelerate after the payout change.
II. All else equal, the firm's share price will go up after the payout change.
III. All else equal, the firm's P/E ratio will increase after the payout change.

Question

Quizplus · Accepted Answer

By cutting its dividend payout, the firm retains more earnings, which can be reinvested to generate higher growth. This accelerates the firm's growth rate, aligning with the shareholders' desired capital gain yield. However, the share price and P/E ratio changes depend on market perception and are not guaranteed to increase solely due to the payout change.

A Firm That Has an ROE of 12% Is Considering