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Dividend Policy and Price-Earnings Ratio

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For each of the following four groups of companies, state whether you would expect them to distribute a relatively high or low proportion of current earnings and whether you would expect them to have a relatively high or low price-earnings ratio.

a. High-risk companies.
b. Companies that have recently experienced a temporary decline in profits.
c. Companies that expect to experience a decline in profits.
d. 'Growth' companies with valuable future investment opportunities.

'Risky companies tend to have lower target payout ratios and more gradual adjustment rates.' Explain what is meant by this statement. Why do you think it is so?

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For each of the following four groups of companies, state whether you would
expect them to distribute a relatively high or low proportion of current earnings and whether
you would expect them to have a relatively high or low price-earnings ratio.
a. High-risk companies.
b. Companies that have recently experienced a temporary decline in profits.
c. Companies that expect to experience a decline in profits.
d. 'Growth' companies with valuable future investment opportunities.

a. High-risk companies.
Payout: Distribute Low proportion of current earnings; high risk ...

Solution Summary

The solution provides answers to 2 questions
The first problem deals with the dividend policy likely to be followed by High-risk companies, Companies that have recently experienced a temporary decline in profits, Companies that expect to experience a decline in profits and 'Growth' companies with valuable future investment opportunities.
The second problem discusses why Risky companies tend to have lower target payout ratios and more gradual adjustment rates.

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See Also This Related BrainMass Solution

Dividend Policy

20. Dividend Policy. Here are several assertions about typical corporate dividend policies. Which of them are true? Write out a corrected version of any false statements.
a. Most companies set a target dividend payout ratio.
b. They set each year's dividend equal to the target payout ratio times that year's earnings.
c. Managers and investors seem more concerned with dividend changes than dividend levels.
d. Managers often increase dividends temporarily when earnings are unexpectedly high for a year or two.

21. Dividend Policy. For each of the following four groups of companies, state whether you would expect them to distribute a relatively high or low proportion of current earnings and whether you would expect them to have a relatively high or low price-earnings ratio.

a. High-risk companies.
b. Companies that have recently experienced a temporary decline in profits.
c. Companies that expect to experience a decline in profits.
d. "Growth" companies with valuable future investment opportunities.

22. Dividend Policy. "Risky companies tend to have lower target payout ratios and more gradual adjustment rates." Explain what is meant by this statement. Why do you think it is so?

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