In the percent-of-sales method
A)as the dividend payout ratio goes up, the required new funds also rises.
B)as the dividend payout ratio rises, the required new funds declines.
C)the dividend payout ratio does not affect new funds.
D)None of the options.

Question

Quizplus · Accepted Answer

In the percent-of-sales method, the dividend payout ratio determines the percentage of earnings that will be paid out as dividends. As the dividend payout ratio goes up, more earnings are paid out as dividends, thus reducing the amount of retained earnings available for investment in the business. This means that the company will have to raise more new funds (through debt or equity issuance) to finance its growth, and therefore the required new funds also rise.

In the Percent-Of-Sales Method