Question

In general, the higher a firm's return on equity, the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings.

• higher; higher

• lower; higher

• lower; lower

• higher; lower

Answer 1

Answer: The correct option is "lower; higher"

Explanation:
Return on equity=(Net income)/(Shareholders' equity)
If return on equity is higher, it means the net income available to the common shareholders will be higher which means that the dividend payment (or the dividend payout ratio) will be lower.

Sustainable growth rate=(1-Payout ratio)*(Return on equity)
If dividend payout ratio is lower, growth rate will be higher.