A firm is investing retained earnings in investments, Ask an Expert

Finance

A firm is investing retained earnings in investments earning positive returns. As a result of these investments, earnings-per-share is growing. Can we assume that common stock prices are also increasing as a result of these investments?

A) Yes, because higher earnings translate to higher dividends and, therefore, higher stock prices.

B) No, earnings will grow as long as investment earns a positive return. However, if the investments are earning positive returns that are less than their opportunity costs of capital, earnings-per-share will grow,but, stock prices will decrease.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92768894

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