Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant? A. Growth in earnings requires growth in dividends.
B. Retaining a higher percentage of earnings will result in a higher growth rate.
C. Long-run earnings growth occurs primarily because firms pay dividends to reward their shareholders for investing in the company.

Statement B. Retaining a higher percentage of earnings will result in a higher growth rate.

Explanation:

The earnings are the profits that is left after paying interests and taxes and now all we have to do is pay the dividend. The company pays a percentage of earnings after tax as a dividend and the remainder is reinvested in the business. This helps the company to increase its earnings by reinvestment so that the company is able to lead in the market.

The earnings of the company are not affected by the dividend payout if the working capital is not affected because dividends are dependent on earnings. Hence the statement 1 is incorrect.

This means that the retaining higher percentage of earnings will increase the growth rate as the reinvestment has increased and it will increase the earnings. Hence the statement 2 is correct.

Company doesn't pay dividend to shareholders for reinvestment in the company. They pay dividends because the shareholders demand return on the risk associated with the investment. Hence the statement 3 is incorrect.

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