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 the dividend payout ratio is zero.
D) Its stock price will decline unless the plowback rate exceeds the required return.

Question

Quizplus · Accepted Answer

If a firm reinvests its earnings at a rate equal to the firm's required return, it is essentially generating enough earnings to maintain its current operations and investments without increasing them. This means that the firm is not growing, and therefore its stock price will remain constant.

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