Question
In: Finance
Would a firm that has many good investment opportunities be likely to have a higher or...
Would a firm that has many good investment opportunities be
likely to have a higher or a lower dividend payout ratio than a
firm with few good investment opportunities? Explain.
Solutions
Expert Solution
ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.
A firm with many good investment opportunities will likely plough back its profits and invest its profits back into the business to pursue many good investment opportunities.
As the company will be ploughing back its profits to retain its earnings, it will pay less dividend, hence it will have a lower dividend payout ratio.
A company that has few good investment opportunities will not have many choices to utilise its profits. Hence it will pay out more dividend then compared to the company which has many good investment opportunities.
Therefore a company with few good investment opportunities dividend payout ratio will be high.
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