Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / Under which of the following scenarios will increasing the payout ratio for a firm decrease its equity value? A) Never B) Always C) When the return on equity is equal to its cost of equity D) When the return on equity is less than the cost of equity E) When the return on equity is greater than the cost of equity
Under which of the following scenarios will increasing the payout ratio for a firm decrease its equity value?
A) Never
B) Always
C) When the return on equity is equal to its cost of equity
D) When the return on equity is less than the cost of equity
E) When the return on equity is greater than the cost of equity
Answer-
The correct Option is D.
When the return on equity is less than the cost of equity.
The increase in the payout ratio for a firm decrease its equity value when the return on equity is less than the cost of equity.
This is because when the dividends payout ratio ( D/E ) is increased the retained earnings decreases and the equity value decreases when the cost of equity is higher than the ROE = Net Income / Equity.
The other Options are A, B, C and E are incorrect.
