Asked by Alyssa Reaume on Jun 11, 2024
Verified
A firm that retains earnings does the equivalent of
A) lending money to the firm's shareholders.
B) borrowing money from the firm's shareholders.
C) decreasing the net worth of the firm's shareholders.
D) decreasing its own net worth.
Retains Earnings
The portion of a company's profits that are kept or withheld from shareholders to reinvest in the business or pay off debt.
Net Worth
The total assets minus total liabilities of an individual or company, indicating financial health.
Shareholders
Individuals or entities that own shares in a corporation, entitling them to a portion of its earnings and assets.
- Understand the significance and effects of retained earnings on business investment and shareholder wealth.
Verified Answer
CT
Christopher ThurmanJun 16, 2024
Final Answer :
B
Explanation :
When a firm retains earnings, it is essentially using the profits that could have been distributed to shareholders (as dividends) for its own purposes, such as reinvestment in the business. This can be viewed as borrowing money from the shareholders because the firm is holding onto profits that legally belong to the shareholders, using those funds to potentially generate more value for the firm instead of distributing them.
Learning Objectives
- Understand the significance and effects of retained earnings on business investment and shareholder wealth.