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, it means the firm is not creating any excess returns. Therefore, the firm's stock price will remain constant as investors will not be willing to pay a premium for the company's shares.

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