Question

There are two statements, Assertion (A) and Reason (R).
Assertion (A): The dividend in growth companies is more than that in the non-growth companies.
Reason (R) : Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment.
Choose the correct alternative from those given below:

• A. Assertion (A) is false and Reason (R) is true.
• B. Both Assertion (A) and Reason (R) are false.
• C. Assertion (A) is true and Reason (R) is false.
• D. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

Hint:

Remember: High Growth Potential = High Retention = Low Dividend. Low Growth Potential = Low Retention = High Dividend.

Answer 1

The Correct Option is A

Step 1: Evaluate Assertion (A): Dividend in growth companies is more than in non-growth companies.
Think about what growth companies do with their profits. Companies with high growth potential are continuously investing in new projects, research, and expansion. They need large amounts of internal funds for this purpose.
Step 2: Understand how growth companies treat profits.
Growth companies tend to retain a larger portion of their earnings rather than distributing them as dividends. Retained earnings are the cheapest and easiest internal source of finance. By retaining profits, the company avoids the cost and complexity of raising funds externally.
Step 3: Conclusion on Assertion (A).
Because growth companies retain more earnings for reinvestment, they actually pay lower dividends compared to mature or non-growth companies. Assertion (A) is therefore false.
Step 4: Evaluate Reason (R): Companies with good growth opportunities retain more money to finance investment.
This is correct. Growth companies need funds for expansion and therefore prefer to retain profits rather than distribute them. Reason (R) is true.
Step 5: Cross-check: does (R) explain (A)?
(R) explains why growth companies pay less dividend (they retain more), but (A) says they pay more dividend, which is wrong. So (R) is true but does not explain (A) because (A) itself is false.
Step 6: Select the correct option and confirm.
Assertion (A) is false and Reason (R) is true.
\[ \boxed{ \text{(A) Assertion (A) is false and Reason (R) is true.} } \]