If a Firm Pays Out All of Its Earnings as Dividends

question 12

True/False

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested, the company should reconsider its dividend policy and possibly move to a lower payout ratio.

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Definitions:

Asset Allocation

The strategic distribution of investment across various asset classes such as stocks, bonds, and real estate to optimize risk and return.

Active Management

Attempts to achieve portfolio returns more than commensurate with risk, either by forecasting broad market trends or by identifying mispriced sectors of a market or particular securities.

Target-date Funds

Mutual funds that automatically adjust their asset mix towards more conservative investments as the target date (usually retirement) approaches.

Asset Allocation

The process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash, to optimize risk and reward based on an individual's goals and risk tolerance.