Holding the growth rate constant, the higher a firm's dividend payout ratio, the larger the amount of external debt or equity financing needed.

Question

Quizplus · Accepted Answer

When a firm has a higher dividend payout ratio, it retains less earnings, which means it has less available funds to invest in growth opportunities. Therefore, if the firm wants to maintain its growth rate, it will need to seek external funding sources such as debt or equity financing.

Holding the Growth Rate Constant, the Higher a Firm's Dividend