Which of the Following Best Explains Why We Can Calculate

question 66

Multiple Choice

Which of the following best explains why we can calculate stock prices from either expected earnings or expected dividends?

• A)Because a firm must eventually distribute all its earnings to shareholders, in the long run, earnings determine how much dividends can be paid.
• B)Because a firm must eventually distribute all its earnings to shareholders, in the short run, earnings determine how much dividends can be paid.
• C)Because a firm must eventually distribute all its earnings to shareholders, if a firm builds up excess earnings, the difference between dividends and earnings goes to the firm's board of directors.
• D)Expected earnings never determine the stock price.

---

Definitions:

Selling Commission

A fee paid to a sales agent or an employee based on the value of sales generated.

Contribution Margin

The amount remaining from sales revenue after variable production costs have been deducted, indicating how much contributes toward covering fixed costs and generating profit.

Contribution Format

A contribution format income statement categorizes costs as variable or fixed and calculates a contribution margin.

Net Operating Income

Profits from a company's core business operations, excluding deductions of interest and taxes.