Which of the following statements is FALSE regarding profitable and unprofitable growth?

A. If the firm retains more earnings, it will be able to pay out less of those earnings, which means that the firm will have to reduce its dividend.

B. If a firm wants to increase its share price, it must cut its dividend and invest more.

C. A firm can increase its growth rate by retaining more of its earnings.

D. Cutting the firm's dividend to increase investment will raise the stock price if, and only if, the new investments have a positive net present value (NPV).

1 Answer

  • Since B and D are so much alike, I would say one or the other has to be the FALSE answer (as is the nature of multiple choice questions).

    Since D qualifies a strategy, and B just states that strategy blindly, I would say B is false.

    A company that issues a dividend but also seeks to grow its per-share price is a GROWTH AND INCOME company. By cutting the dividend, you are reducing the INCOME of the investors.

    Cutting a dividend usually leads to a decline in per-share price -- the value of the stock is reduced since the income it provides is reduced.

    "Investing more" means nothing without qualification of what you are investing in. So B -- cutting dividend and investing instead (IN WHAT?) -- doesn't seem to support an idea that the firm's per-share price should increase in the market.

Hottest videos

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts