If a firm pays out a higher percentage of earnings, new equity capital will have to be raised with common stock, which will result in higher control and earnings for the existing owners.

Question

Quizplus · Accepted Answer

If a firm pays out a higher percentage of earnings as dividends, there will be less earnings available to reinvest back into the company. This could result in a lower growth rate and potentially a need to raise new equity capital with common stock. This would dilute the ownership and earnings of existing shareholders, rather than increasing it.

If a Firm Pays Out a Higher Percentage of Earnings