A firm is investing retained earnings in investments earning positive returns. A

Question

A firm is investing retained earnings in investments earning positive returns. As a result of these investments, earnings-per-share is growing. Can we assume that common stock prices are also increasing as a result of these investments?

A) Yes, because higher earnings translate to higher dividends and, therefore, higher stock prices.

No, earnings will grow as long as investment earns a positive return. However, if the investments are earning positive returns that are less than their opportunity costs of capital, earnings-per-share will grow,but, stock prices will decrease.

No, earnings will grow as long as investment earns a positive return. However, if the investments are earning positive returns that are less than their opportunity costs of capital, earnings-per-share will grow,but, stock prices will decrease.

Explanation / Answer

No, earnings will grow as long as investment earns a positive return. However, if the investments are earning positive returns that are less than their opportunity costs of capital, earnings-per-share will grow,but, stock prices will decrease.

the above is answer

because for stock price to go up the firm shoud earn higher than cost of capital or opporunity cost.

No, earnings will grow as long as investment earns a positive return. However, if the investments are earning positive returns that are less than their opportunity costs of capital, earnings-per-share will grow,but, stock prices will decrease.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.