If a Corporation Retains All Its Profits and Distributes None

question 64

Multiple Choice

If a corporation retains all its profits and distributes none of the profit to owners, how can owners benefit?

• A)If the retained earnings are expected to create future profits, the market price of the firm's stock will increase and create a capital gain for stockholders if the stock is sold.
• B)Shares of stock can be converted into bonds so stockholders will be able to earn coupon payments.
• C)Owners will only benefit if some profits are paid out in the form of dividends.
• D)Owners will benefit by changing the board of directors.

---

Definitions:

Default Risk Premium

The additional yield that investors require to invest in bonds that have a risk of default, compared to risk-free bonds.

Liquidity Risk Premium

The extra yield or return that investors demand for holding a security that may not be easily sold or converted into cash without a significant loss in value.

Maturity Risk Premium

The additional yield demanded by investors as compensation for the increased risk of holding a bond as it approaches its maturity date.

Inflation Rate

The rate at which the general level of prices for goods and services is rising, and, subsequently, the purchasing power of currency is falling.