What Happens to a Firm That Reinvests Its Earnings at a Rate

question 61

Multiple Choice

What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?

• A) Its stock price will remain constant.
• B) Its stock price will increase by the sustainable growth rate.
• C) Its stock price will decline unless the dividend payout ratio is zero.
• D) Its stock price will decline unless the plowback rate exceeds the required return.

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Definitions:

Balance Sheet

A report detailing a firm's assets, liabilities, and equity of shareholders at a particular moment.

Analyzing Transactions

The process of reviewing and scrutinizing financial transactions to ensure they are correctly recorded in the accounting records.

Ledger

A comprehensive collection of a company's financial accounts, transactions, and balances.

Current Liabilities

Financial liabilities scheduled for payment within a year or the regular business cycle.