Use the following statements to answer this question:
I.A firm's growth depends on its reinvestment opportunities.
II.Increasing the firm's retention ratio does not always increase the value of the firm.
A)I and II are correct.
B)I and II are incorrect.
C)I is correct and II is incorrect.
D)I is incorrect and II is correct.

Question

Quizplus · Accepted Answer

Both statements are correct. Statement I is true because a firm's ability to grow often depends on its ability to reinvest its earnings into profitable opportunities. Statement II is also true because simply retaining more earnings (increasing the retention ratio) does not guarantee increased firm value; the retained earnings must be invested in projects that yield a return above the firm's cost of capital.

Use the Following Statements to Answer This Question