If a firm cannot invest retained earnings and earn at least the cost of equity, it should pay these funds to shareholders and let them invest directly in other assets that do provide this return.

Question

Quizplus · Accepted Answer

If a firm cannot earn at least the cost of equity on retained earnings, it means that the funds are not being used to generate maximum value for shareholders. In such cases, it is better to distribute the retained earnings to shareholders, who can then invest directly in other assets that offer higher returns. This would ensure that the funds are being used efficiently to generate maximum value for shareholders.

If a Firm Cannot Invest Retained Earnings and Earn at Least