Which of the following statements is most correct? Equity generated by retained earnings is costless. For-profit...

Which of the following statements is most correct?

		Equity generated by retained earnings is costless.
		For-profit firms should always retain the full amount of net income and reinvest it in the business.
		For-profit firms should always pay out the full amount of net income as dividends.
		For-profit firms should distribute net income through dividends if they cannot earn as much as stockholders could in similar-risk investments.
		None of these statements are correct.

Solutions

Expert Solution

ANSWER

CORRECT OPTION : Option (d) : For-profit firms should distribute net income through dividends if they cannot earn as much as stockholders could in similar-risk investments.

Explanation :

One of the main objectives of a company is to maximize its shareholder's wealth. Such objective can be achieved by working toward an increase in the share price of company. According to famous dividend theories, a company shall only distribute dividends if it is not able to earn on retained earnings as shareholders could earn on such money. On the other hand, if company has better investment opportunities for expansion projects than it should not pay any dividend and invest on the expansion of the company. This will ultimately create higher market value of company's share.

jeff jeffy answered 1 year ago

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