The primary argument against the "marginal principle of retained earnings" is
A) the uncertainty surrounding capital investment projects.
B) the lack of ability to adequately measure corporate investment returns.
C) the diversity of stockholders and their potential investment returns.
D) its failure to consider stockholder preferences.

Question

Quizplus · Accepted Answer

The marginal principle of retained earnings assumes that all stockholders have the same preferences for reinvestment of earnings, which may not be true due to the diversity of stockholders and their potential investment returns. Therefore, it fails to consider the preferences of individual stockholders, making it an ineffective method for determining how much of a firm's earnings should be retained for reinvestment.

The Primary Argument Against the "Marginal Principle of Retained Earnings