What happens to a firm that reinvests its earnings at a rate equal to the firm's required return?
A)its stock price will remain constant
B)its stock price will increase by the sustainable growth rate
C)its stock price will decline unless dividend payout ratio is zero
D)its stock price will decline unless plowback rate exceeds required return

Question

Quizplus · Accepted Answer

If a firm reinvests its earnings at a rate equal to the firm's required return, then there will be no excess earnings to distribute as dividends. This would result in a constant stock price because shareholders would not see any additional value created by the retained earnings.

What Happens to a Firm That Reinvests Its Earnings at a Rate