Describe how the following factors affect external capital requirements: (1) payout ratio

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Describe how the following factors affect external capital requirements: (1) payout ratio

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Describe how the following factors affect external capital requirements:
(1) payout ratio

Explanation & AnswerSolution by a verified expert

Explanation

A company having a high payout ratio implies that a company pays more dividend to its shareholders as compared to its earnings so it has to depend on external capital to carry on its operations.
 
On the other hand, a company with lower payout ratio implies that a company pays less dividend to the shareholders as compared to its earnings. This means that the company has some earnings reserved for making new investments which makes less dependency on external capital requirements.

Verified Answer

A higher payout ratio implies more external capital requirement whereas a lower payout ratio implies less requirement for external capital.

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