Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
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
Expert Solution
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.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
