Financial mngmnt

timer Asked: Nov 12th, 2015

Question description

21. A small biotechnology research corporation has been experiencing losses for the first three

years of its existence, and thus has a negative balance in retained earnings. The corporation’s

stock price, however, is $1 per share. Which of the following statements is MOST correct?

a. The required return on the stock will be small because the company has very few assets.

b. Investors believe the stock is worth $1 per share because future earnings (and cash flows)

are expected to be positive.

c. The corporation’s accountants must have made a mistake because retained earnings may

not be negative.

d. Investors are irrational to pay $1 per share when earnings per share have been negative for

three years.

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