Question

If a firm cannot invest retained earnings to earn a rate of return _______ the required rate of return on retained earnings, it should return those funds to its stockholders.

a. less than
b. greater than or equa to

Answer 1

The answer is B.

Step-by-step explanation:

Retained earnings are the part of net income that are not distributed as to shareholders as dividends but are instead retained for investment that could improve future earnings of the firm.

Rate of return is the return that shareholders or management are expecting to generate from a business venture.

Rate of return must always be equal to or greater than a target rate or pre-planned rate if not, it decreases the wealth of the shareholders or decreases the value of the company.