Holding all else equal, an decrease in which of the following will cause an increase in the theoretical growth rate of common stock dividends according to the
Growth Rate of Dividends Model?
I. ROE -
II. Payout ratio -
III. Tax rate IV Preferred stock price
V. Discount rate -
VI. Retention rate -
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A. B. C. D. E. F.B
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 a decrease in the dividend payout ratio will cause an increase in the theoretical growth rate of common stock dividends.