If a firm pays out all of its earnings as dividends and its

If a firm pays out all of its earnings as dividends and its stockholders then elect to have all of their dividends reinvested, the company should reconsider its dividend policy and possibly move to a lower dividend payout ratio.

a.True

b.False

Solution

The statement is correct.

In public sector company dividend decision taken by board of directors, however if investors choose not to in cash the dividend and reinvest it, management have to reconsider their decision.

If the dividend amount is decreased, it will leads to lower dividend payout ratio, as dividend payout ratio = Dividend distributed/ net income