corp: Reading 31, q5 and q7: page 31: dividend policy

the solution to q5 and q7 is kind of conflict with each other, one said that “a decrease in the quarterly dividend rate is likely to signal negative information” Q7 said that : “with low growth prospects, a company would tyipically have a high payout ratio”… any thought? THanks.

reduction in dividend is usually a negative signal because it implies reduced profitability (though it could mean that the company has lots of high NPV projects) A company that does not have many projects that return greater than the cost of equity (a low growth company) has to do something with their cash. If they invest in projects that return less than cost of equity they will destroy value so the best alternative is to distribute it to shareholders