e. Based upon the dividend payout ratio only, what would you expect this company’s view to be regarding re-investing earnings back into the business versus paying them out in stockholder dividends?
f. Would you advise Tina to buy this stock? What additional information might you seek in order to help her make a good decision? Explain your answer.
Answers:
E. The company should reduce the dividend payout to stockholders and increase the amount of money that is reinvested. However, that may affect the stock price, "if the company suddenly decreases the amount of dividends paid, then the stock price may fall." (208).
F. Tina should buy the stock, the current Payout ratio is high. If she does that, she should reconsider if the company decides to reduce the Payout. She should look deeper into the company's habits and find out how sturdy the company is. If she believes it is worth it, she should go for it. "The market price of the stock, is determined by the value that stockholders perceive the company’s shares are worth." (207).
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