A Firm Will Set a Low Payout Ratio and Finance

question 9

Multiple Choice

A firm will set a low payout ratio and finance by retaining earnings rather than through the sale of new common stock when the:

• A) cost of external equity is higher than the cost of internal equity.
• B) management wants to dilute the ownership.
• C) firm has no constraints in distributing dividends.
• D) firm has excess cash to distribute.
• E) firm has less investment opportunities to use its earnings.

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Definitions:

Communication Channel

The medium or method through which information is transmitted from one entity to another.

Impersonality

The quality of being devoid of personal feeling or bias, often associated with objectivity or detached professionalism.

Division of Labor

The assignment of different tasks to different people or groups in an organization to increase efficiency and productivity.

Span of Control

The number of subordinates or units that a manager or leader can directly control or supervise effectively.