Reality Films,Inc

question 155

Multiple Choice

Reality Films,Inc.is a very profitable company whose stock has appreciated in market value during the past ten years.Even though the firm was established several years ago,it does not pay its stockholders dividends.Reality Films reinvests its earnings.Which of the following statements might best reflect the sentiments of its chief financial officer CFO) ?

• A)There is no purpose in paying dividends to stockholders when it is not required by law.After all,dividends are not tax deductible!
• B)Stockholders receive interest payments twice each year.They do not receive dividends.
• C)Retained earnings are an important source of equity funds for the company.Reinvestment of earnings helps to lower the overall cost of capital.
• D)Retained earnings increase a firm's cost of capital.The higher the cost of capital,the higher the rate of return to investors.

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Definitions:

Stock Split

A decision by a company to increase the number of its outstanding shares by issuing more shares to current shareholders.

Common Stock

An equity ownership interest in a corporation, typically entitling the owner to vote on corporate governance matters and receive dividends.

Earnings Per Share

A company's profit divided by the number of outstanding shares of its common stock, indicating the company's profitability.

Outstanding

An adjective describing something that is still in progress, unsettled, not yet resolved, or in the case of financials, amounts owed that have not yet been paid.