For the growth rate in earnings per share to be constant over time,

Question

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If the growth rate in earnings per share is to be constant over time, it means the company has to keep reinvesting its earnings and achieve the same rate of return on these new investments. Hence, the average return on new investments must be constant. If the company keeps the same payout ratio, it will have less money to reinvest and will not be able to maintain a constant growth rate. Hence, the retention ratio must remain constant or even increase to achieve constant growth rate. Choice A is incorrect because decreasing the payout ratio will lead to a decrease in retention ratio and hence, the growth rate will not be constant. Choice B is incorrect because a 100% payout ratio means the company is not retaining any earnings and cannot reinvest them, leading to a growth rate of zero.

For the Growth Rate in Earnings Per Share to Be