What Effect on the Growth Rate of Earnings Can Be

question 32

Multiple Choice

What effect on the growth rate of earnings can be accomplished by decreasing the dividend-payout ratio from 70 percent to 40 percent if the firm has an ROE of 20 percent?

• A)The growth rate can increase from 6 percent to 10.5 percent
• B)The growth rate can increase from 6 percent to 12 percent
• C)The growth rate can increase from 8 percent to 14 percent
• D)The growth rate can increase from 11 percent to 14 percent current growth rate in earnings = plowback ratio x ROE
• = )3 x .2 = 6%

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Definitions:

Accounts Receivable

Amounts owed to a business by its customers for goods or services delivered on credit.

Revenue Recognition

A principle guiding how and when revenue is recognized in the accounting records, generally when earned and realizable.

Economic Substance

The underlying economic or commercial purpose of a transaction, which must exist for it to be recognized for tax or accounting purposes.

Legal Form

Refers to the legal structure or type of business entity, such as corporation, partnership, sole proprietorship, etc., which determines legal liabilities and taxation methods.