ABC CorpHas an ROE of 20% and a Current Dividend Payout

question 102

Multiple Choice

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

• A) A decrease in the dividend payout ratio to 35% 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% while holding ROE constant
• D) An increase in dividend payout ratio to 50% and an increase in ROE to 25%

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Definitions:

Efficient Frontier

A concept in modern portfolio theory representing a set of optimal investment portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

Capital Asset Pricing Model

A model that describes the relationship between systemic risk and expected return for assets, particularly stocks, used to calculate a theoretically appropriate required rate of return for an asset, given its non-diversifiable risk.

Expected Rate

The anticipated return on an investment based on historical averages, interest rates, or economic indicators.

Illiquidity Premiums

Additional return expected by investors for holding assets that are difficult to trade quickly without significant price concessions.