A firm can retain more of its earnings if it can convince its stockholders that it will earn at least their required return on the reinvested funds.

Question

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If a firm can convince its stockholders that it will earn at least their required return on the reinvested funds, it may be able to retain more earnings rather than paying out dividends to shareholders. This is because shareholders will see the potential for future growth and value in the company and be willing to forego current returns in order to participate in that growth.

A Firm Can Retain More of Its Earnings If It