Enterprise Corp typically pays 80% of its net income in dividends. A. Do you believe Enterprise...

Enterprise Corp typically pays 80% of its net income in dividends.

A. Do you believe Enterprise has [many] or [few] good investment opportunities?

B. Do you expect its net income to increase at a [fast] or [slow] rate?

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Expert Solution

A.when a company is paying out 80% of its income that means that its dividend payout ratio is 80%, which is an indication that the company is not opting to hold onto its income and profits because it does not have much of investment opportunities that can offer it with high rate of return so it is opting for paying out of its income to the shareholders of the company.

high payout ratio of dividend indicates that the company is a mature company and there is no growth opportunities available to it so it is opting out for payment of dividend in such high ratios to its overall income because it believes that it do not have the potential project to invest into, in order to make that money grow into higher profits as the reinvestment rate on investments are very low.

yes it is an indication that company do not have potential projects which can offer it with high rate of return.

B .) I will expect the companies net income to increase at a slower pace because it is not using the earlier income to re invest into the business, and it is opting to pay out its income to the shareholders so the company could not have that much liquidity in its hands in order to fund for its growth, so the company will not be having adequate growth in order to increase its income, so it can be said that the company is projected to grow at a slower pace because it is not reinvesting into its projects.

jeff jeffy answered 1 year ago

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