Which of the following best explains why we can calculate stock prices from either expected earnings or expected dividends?
A)Because a firm must eventually distribute all its earnings to shareholders, in the long run, earnings determine how much dividends can be paid.
B)Because a firm must eventually distribute all its earnings to shareholders, in the short run, earnings determine how much dividends can be paid.
C)Because a firm must eventually distribute all its earnings to shareholders, if a firm builds up excess earnings, the difference between dividends and earnings goes to the firm's board of directors.
D)Expected earnings never determine the stock price.

Question

Quizplus · Accepted Answer

The reason we can calculate stock prices from either expected earnings or expected dividends is that, in the long run, a firm must eventually distribute all its earnings to shareholders, meaning that earnings determine how much dividends can be paid. Therefore, the expected earnings of a company can give us an idea of how much dividends will be paid, and this information can be used to estimate the stock price.

Which of the Following Best Explains Why We Can Calculate