Angel Inc. is a growing firm and has $1,200,000 in earnings and excess cash of $600,000. The company has had a good year and is trying to decide whether retain and reinvest the cash or pay it out to its shareholders in the form of dividends.

The company has 500,000 shares outstanding and a P/E ratio of 20.

If the funds are retained and reinvested at 10 percent, the companys P/E ratio would increase by 23 percent.

On the other hand, If the funds are paid out in the form of dividends, it is expected that that the P/E ratio will increase by 15 percent.