Assuming a return on equity greater than the required return, an increase in the dividend payout ratio will cause a(n) _____ in the sustainable growth rate.

Question

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An increase in the dividend payout ratio would result in a decrease in the retention ratio, which is the portion of earnings that is reinvested into the firm. As a result, the growth rate would decrease, leading to a decrease in the sustainable growth rate.

Assuming a Return on Equity Greater Than the Required Return