Question

Companies with a higher growth potential are likely to

(a) pay lower dividends

(b) pay higher dividends

(c) dividends are not affected

(d) none of the above

Answer 1

(a) Companies which have higher growth potential are likely to pay lower dividends. This is because the companies having higher growth potential have greater investment plans and require larger funds for investment. Thus, they retain a greater portion of their earnings to finance the required investment and thereby, pay lower dividends.