Reality Films,Inc.is a very profitable company whose stock has appreciated in market value during the past ten years.Even though the firm was established several years ago,it does not pay its stockholders dividends.Reality Films reinvests its earnings.Which of the following statements might best reflect the sentiments of its chief financial officer CFO)?

Question

Quizplus · Accepted Answer

The statement that "retained earnings are an important source of equity funds for the company" and "reinvestment of earnings helps to lower the overall cost of capital" reflects the sentiment of the CFO that their firm's policy of retaining earnings instead of paying dividends is beneficial for the company. Option A is incorrect as it assumes that paying dividends is pointless, and disregards the potential benefits of paying dividends to shareholders. Option B is incorrect as it describes interest payments, which are different from dividend payments. Option D is incorrect, as retained earnings do not increase a firm's cost of capital.