An increase in which of the following, holding everything else equal, will cause a decrease in the theoretical growth rate of common stock dividends according to the Growth Rate of Dividends Model?
I. Return on equity -
II. Tax rate -
III. Dividend payout ratio -
IV. Annual dividend -
V. Discount rate -
VI. Beta coefficient -
VII. Retention rate -
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A. B. C. D. E. F.Explanation
III The equation used to determine the theoretical growth rate of common stock dividends is as follows: {Annual growth rate = [ROE * (1 - dividend payout ratio)]}
As you can see, of the choices listed, only an increase in the dividend payout ratio will cause a decrease in the theoretical growth rate of common stock dividends.
Remember that the retention rate is equal to (1 - dividend payout ratio). Additionally, neither the discount rate nor the tax rate is explicitly factored into the dividend growth rate equation.