How does an increase in dividend payouts affect the sustainable growth rate of a firm? Why?

How does an increase in dividend payouts affect the sustainable growth rate of a firm? Why?

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Expert Solution

Increase in dividend payout will be affecting the sustainable growth rate of the firm, because large amount of profits are paid out to the shareholders of the company and the company will be having lower amount of profits left in their hands as retention, so they will be having lesser amount of profits to reinvest into their overall business so, it will be affecting the sustainable growth rate of the company.

When there is an increase in dividend payout, it will mean that the company's referring to pay out a higher amount of its profit to the overall shareholders and company is retaining lesser of the profit in its own hand so company will be left out with lesser amount of cash to reinvest into the projects of the company, so the company will be having a higher payout ratio and lower retention ratio will be lesser reinvesting and it will be having lesser growth opportunities because of lower reinvestment and it would be lowering the sustainable growth rate of the company

jeff jeffy answered 1 year ago

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