Tricky FSA question question, companies, different, rapid

RealEstate_CFA

two companies are identical except for substantially different dividend payout ratios. After several yrs, the company with the lower dividend payout ratio is MOST likely to have:

a. lower stock price
b. higher debt/equity ratio
c. less rapid growth of earnings per share
d. more rapid growth of earnings per share

MonkeyBusiness

Hi you guys..

I see you're talking about A possibly being correct - that is the "dummy choice" for this question..

because stock price has nothing to do with financials of the company... the stock price is simply the price that the stock is trading for in the market and can be independent of financials... in other words - retained earnings does not have a direct (it does have an indirect) effect on the price of a stock -- the payout ratio is not the same as the price of the stock either

marsilni

I always use it as savago said. I think of Apple as an example, they have big growth, because they don't have dividends, compared to a company which does have dividends, apple will grow larger because they have more cash to work with, and expand with. Theres probably better examples, but Apples the first that comes to mind and helps me remember it

sgupta0827

A. Higher G will lower denominator in P= (div)/(k-g)
B. Retained earnings will increase Equity
C. No. g = RR*ROE
D. Yes g=RR*ROE

Wasteoftime

I always use it as savago said. I think of Apple as an example, they have big growth, because they don't have dividends, compared to a company which does have dividends, apple will grow larger because they have more cash to work with, and expand with. Theres probably better examples, but Apples the first that comes to mind and helps me remember it.

RobertA

I always use it as savago said. I think of Apple as an example, they have big growth, because they don't have dividends, compared to a company which does have dividends, apple will grow larger because they have more cash to work with, and expand with. Theres probably better examples, but Apples the first that comes to mind and helps me remember it.

agulani

the problem with PE falling is you can't really determine if it's the price that's falling or if the earnings that are increasing.

So D would also cause PE to fall.

(this is in reply to June's post)



Edited 1 time(s). Last edit at Wednesday, June 3, 2009 at 08:17PM by lincfucious.

dcfox83

sevago00 Wrote:
-------------------------------------------------------
> Here's another way to think of it:
>
> The company can do 2 things with the money they
> make.
> (1) give it away by dividends
> (2) keep it in retained earnings.
>
> If they keep it, they can reinvest it and make
> more money instead of borrowing money.

Only if they are earning more than the current ROE on new projects, otherwise, Ide rather take the div??

dece2011

g = retention rate * ROE

retention rate = 1 - dividend payout ratio

SO>> low div payout ratio = HIGH retention rate

High retention rate = high g

because

g = retention rate * ROE




cool?

mnieman

Well the main reason I didn't say A was that that, because retention ratio directly impacts g, it had to be either C or D.

But also, the company with the lower dividend payout ratio for so many years is now producing more net income per share.

It can afford to increase its' payout ratio to "industry average" (the "high payout" company) and pay a higher dividend.