Question

Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant?

All else being equal, growth in dividends requires growth in earnings.
Retaining a higher percentage of earnings will result in a lower growth rate.
Long-run earnings growth will decrease when firms retain earnings and reinvest them in the business.

Answer 1

The correct answer is: Retaining a higher percentage of earnings will result in a lower growth rate.; Long-run earnings growth will decrease when firms retain earnings and reinvest them in the business.

Step-by-step explanation:

In the first statement, a deliberate action is shown that consists of the capitalization of the entity, that is, the equity is accumulated in order to distribute it among the shareholders and leave a part to support the company. In the second statement, it means that the positive results of the company will not be seen in the long term due to management's dispositions to execute a policy to capitalize the entity and improve its cash flow by reinvesting the perceived resources.