If a Firm Has a Required Rate of Return Equal

question 68

Multiple Choice

If a firm has a required rate of return equal to the ROE

• A) the firm can increase market price and P/E by retaining more earnings.
• B) the firm can increase market price and P/E by increasing the growth rate.
• C) the amount of earnings retained by the firm does not affect market price or the P/E.
• D) a and b.
• E) none of these.
• If required return and ROE are equal,investors are indifferent as to whether the firm retains more earnings or increases dividends.Thus,retention rates and growth rates do not affect market price and P/E.

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Definitions:

Standard Benefits

Typical or customary advantages provided to employees beyond their wages, such as health insurance, retirement plans, and paid time off.

Endorphins

Natural chemicals in the body that interact with brain receptors to reduce pain perception and boost feelings of pleasure or satisfaction.

Mineralocorticoids

A class of corticosteroids that are involved in regulating sodium and potassium balance in the body.

Prostaglandins

A group of lipids made at sites of tissue damage or infection that are involved in injury and illness processes, such as inflammation.