Decrease in a Firm's Retention Rate of Earnings | CFA Level 1 Exam Prep

Holding Other Things Constant

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Holding other things constant, a decrease in a firm's retention rate of earnings will

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A. B. C. D.

D

A decrease in a firm's retention rate will decrease its expected growth rate of earnings and dividends. This, in turn, will decrease the earnings multiplier. Changes in a firm's retention rate should not affect its return on equity (ROE).