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Enterprise Corp typically pays 80% of its net income in dividends. A. Do you believe Enterprise...

Enterprise Corp typically pays 80% of its net income in dividends. A. Do you believe Enterprise has [many] or [few] good investment opportunities? B. Do you expect its net income to increase at a [fast] or [slow] rate?

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Answer #1

A. Do you believe Enterprise has [many] or [few] good investment opportunities?

As the firm is retaining only 20% of its earnings it should be that it does not have many good investment proposals. If it had many good investment proposals, it would be retaining more than 20% to fund the investments required.

However, the firm may be having a few small investment proposals for which it is retaining the 20%. Or it may be that the 20% is being retained for regular capital investments to maintain the productive capacity.

B. As the firm is retaining only 20% of its earnings, its growth rate would be lower, as growth rate is given by:

Growth rate = ROE*retention ratio. The growth in earnings would not be fast.

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