Question #38
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 15
Status: Unattempted
Correct Answer: B
Question
Which of the following would be least likely to prompt a decline in a company's overall payout ratio?
Answer Choices:
A. A decrease in the capital gains tax rate
B. A permanent decrease in company profitability
C. An increase in interest rates
Explanation
A permanent decrease in profits is expected to result in a decrease in the dividend
payment level; however this would probably not lead to a decrease in the payout ratio. If
interest rates were to increase, it would make retained earnings a more attractive way of
financing new investment; as a result, the payout ratio would be more likely to decline. A
decrease in the capital gains tax rate would (for investors that pay tax) make capital gains
more appealing; accordingly, aggregate payout ratios would be expected to decline.