A small biotechnology research corporation has been experiencing losses for the

Question

A small biotechnology research corporation has been experiencing losses for the first three years of its existence, and thus has a negative balance in retained earnings. The corporation's stock price, however, is $1 per share. Which of the following statements is most correct? A) Investors are irrational to pay $1 per share when earnings per share have been negative for three years. B) Investors believe the stock is worth $1 per share because future earnings (and cash flows) are expected to be positive. C) The corporation's accountants must have made a mistake because retained earnings may not be negative. D) The required return on the stock will be small because the company has very few assets.

Explanation / Answer

B) Investors believe the stock is worth $1 per share because future earnings (and cash flows) are expected to be positive.

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