Question

Companies will set low payout ratios and finance by retaining earnings rather than through the sale of new common stock when:

Select one:

a. flotation costs are high.

b. management wants to dilute the ownership.

c. firm has no constraints in distributing dividends.

d. firm has excess cash to distribute.

e. firm has less investment opportunities to use its earnings.

Answer 1

Solution:-Option A is correct

A.a. flotation costs are high.

Explaination:-Flotation costs are high when Companies will set low payout ratios and finance by retaining earnings rather than through the sale of new common stock.If a firm needs to finance a given level of investment, it can obtain equity by retaining orselling new common stock.If management is concerned about maintaining control, it might be reluctant to sell newstock; hence the company might retain more earnings than it otherwise would.