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.
Correct Answer:
Verified
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