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

question 78

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 dividend payout ratio is zero.
• D) Its stock price will decline unless plowback rate exceeds required return.

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Definitions:

Internal Prohibitions

Internalized rules or moral constraints that serve to control or inhibit certain behaviors or desires.

Superego Development

entails the formation of the ethical component of the psyche in psychoanalytic theory, which starts in early childhood and is influenced by parental values and social norms.

Rationalization

A mechanism of defense by means of which unacceptable thoughts or impulses are reinterpreted in more acceptable and, thus, less anxiety-arousing terms.

Repression

A defense mechanism where the mind unconsciously blocks unwanted memories, thoughts, or feelings from conscious awareness.