Question

A firm has positive net income and a non-zero plowback ratio. Which of the following statements...

A firm has positive net income and a non-zero plowback ratio. Which of the following statements is true?

A. The firm's equity will only increase if they issue shares of stock.

B. The firm's equity will definitely increase, no matter what.

C. If the company issues no new shares of stock, its equity will increase.

D. The firm has no additions to retained earnings.

The answer it gave was B. that was wrong

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Homework Answers

Answer #1

A. The firm's equity will only increase if they issue shares of stock.

firm has positive net income and a non-zero plowback ratio then the equity will not increase. Plow back ratio used to measure how much earnings retained after dividend payment. So this is to know how much profit the firm retained for their working instead of giving to the investors. So if the plow back ratio is non zero and the company have positive net income then they will definetely retain their earnings. There will be less dividend for the shareholders because company retaining their earning. So in this situation only when the company issue new shares then the equity will be increase, otherwise not.

ThankYou...

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