Question

Assume that the company is interested in dramatically expanding its operations and that this expansion will require significant amounts of capital. The company would like to avoid transactions costs involved in issuing new equity. Given this scenario, would it make more sense for the company to maintain a constant dividend payout ratio or to maintain the same per-share dividend?

Answer 1

Answer:

It should maintain the same per share dividend.

Explanation:

If you keep a constant per share dividend, for example, $1 per share, as the price of the shares increases, the payout ratio will start to decrease. This means that the company's retention rate will increase and it will have more money to invest in future projects. The company needs funds and it can save it (as retained earnings), borrow it (as debt) or issue equity. The options are limited.