Relative Maturation and Retention Ratio in Industries | CFA® Level 1 Exam Prep

The Relationship Between Relative Maturation and Retention Ratio in Industries

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Question

Which of the following best describes the relationship between the relative maturation of an industry and the retention ratio of companies within the industry?

Further, what is the proposed relationship between expected growth and the relative maturity of an industry?

Answers

A. Negative relationship; negative relationship

B. Positive relationship; negative relationship

C. Negative relationship; positive relationship

D. Negative relationship; no correlation

E. Positive relationship; positive relationship

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Explanations

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A. B. C. D. E.

As an industry advances in maturity, growth of the overall industry will decline. As growth opportunities diminish, companies within the industry will be forced to pay out a larger proportion of their earnings as dividends; i.e. the dividend payout ratio will increase. Remember that the retention ratio is equal to (1 - the dividend payout ratio). Thus, the retention ratio of companies will likely decline as the industryadvances in maturity. The relationship between the dividend payout ratio and the maturity of the industry is negative and loosely linear.

As an industry becomes more mature, growth opportunities decline. This relationship is also loosely linear.

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