What Effect on the Growth Rate of Earnings Can Be

Multiple Choice

What effect on the growth rate of earnings can be accomplished by decreasing the dividend-payout ratio from 70 percent to 40 percent if the firm has an ROE of 20 percent?

A) The growth rate can increase from 6 percent to 10.5 percent
B) The growth rate can increase from 6 percent to 12 percent
C) The growth rate can increase from 8 percent to 14 percent
D) The growth rate can increase from 11 percent to 14 percent current growth rate in earnings = plowback ratio x ROE
= ) 3 x .2 = 6%