Retained Earnings Represent the Source of Net Assets Generated by the Earnings

question 116

Multiple Choice

Retained earnings represent the source of net assets generated by the earnings process that exceed the firm's dividend declarations.Common practice refers to the process of curtailing dividends to accumulate assets, represented by retained earnings, as _____.

• A)operating activities
• B)investing activities
• C)external financing
• D)internal financing
• E)dividend seizure

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Definitions:

Tax Shield

The reduction in income taxes that results from taking an allowable deduction from taxable income.

Bankruptcy Costs

Expenses and financial losses associated with undergoing bankruptcy, including legal fees, asset liquidation costs, and potential loss of business.

Optimal Capital Structure

The best mix of debt, equity, and other financial instruments that maximizes a company's market value while minimizing its cost of capital.

Modigliani And Miller Model

A financial theory proposing that the market value of a company is determined by its earning power and the risk of its underlying assets, and is independent of its capital structure.