A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements 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 stock 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

Reducing the dividend payout allows the firm to reinvest more earnings back into the business, potentially accelerating growth if those investments yield returns above the cost of capital. This can lead to a higher growth rate, supporting statement I. Statements II and III depend on various factors such as market perception, earnings reinvestment success, and overall market conditions, which are not directly implied by the information given.

A Firm That Has an ROE of 12% Is Considering