ABC CorpHas an ROE of 20 Percent and a Current Dividend-Payout

question 53

Multiple Choice

ABC Corp.has an ROE of 20 percent and a current dividend-payout ratio of 40 percent.Which of the following changes will allow their earnings to grow at a 15 percent rate?

• A)A decrease in the dividend-payout ratio to 35 percent while holding ROE constant
• B)A two-percentage-point decrease in ROE while holding dividend-payout ratio constant
• C)A decrease in dividend-payout ratio to 25 percent while holding ROE constant
• D)An increase in dividend payout ratio to 50 percent and an increase in ROE to 25 percent current earnings growth rate = plowback ratio x ROE
• = )6 x .20 = 12%
• Desired earnings growth rate = plowback ratio x ROE

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Definitions:

Immediate Recognition

The accounting practice of reporting revenue or expenses in the current period as they are incurred, without deferral.

Sales Commissions

The expense related to the payment of commissions to sales personnel, typically calculated as a percentage of the sales revenue they generate.

Expense Recognition

An accounting principle that dictates when the cost of business operations should be recorded in the financial statements.