Reinvesting earnings into a firm will not increase the stock price unless:

Question

Quizplus · Accepted Answer

Reinvesting earnings into a firm will only increase the stock price if the ROE of the new investments exceeds the firm's required return. This is because investors are interested in getting a return on their investment and if the firm is not generating a return that exceeds the required return, then investors will not be willing to pay a higher price for the stock. True depreciation being less than reported depreciation and the firm's dividends growing are not necessarily directly related to an increase in the stock price. The new paradigm of stock pricing is not a factor in this case.

Reinvesting Earnings into a Firm Will Not Increase the Stock