To explain: The relation shared between the marginal principle of
Introduction:
Retained Earnings:
Retained earnings is a portion of the profits earned by a business not disbursed by the company as dividend to its shareholders so that it can be used for future investments.
Answer to Problem 1DQ
The marginal principle of retained earnings states that a company should perform an analysis of whether the company or stockholders earn more on the funds related to retained earnings.
Explanation of Solution
Explanation:
As per the marginal principle of retained earnings, the earnings that the stockholders would earn on other investments should also be considered. According to this principle, a company should analyze the earnings of company as well as shareholders to see who earns most on the funds associated with retained earnings.
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Chapter 18 Solutions
FOUND.OF FINANCIAL MANAGEMENT-ACCESS
- Why is there a cost for retained earnings? Group of answer choices Earnings can be reinvested or paid out as dividends Investors could buy other securities, earn a return Neither Eitherarrow_forward(a) What is the purpose of internal earnings targets? (b) What is the risk associated with internal earnings targets?arrow_forwardWhich of the following will reduce Retained Earnings? a. Declaration of a stock dividendb. Payment of a cash dividendc. Profit for the periodd. None of thesearrow_forward
- Why does the equity method record dividends from an investee as a reduction in the investment account, not as dividend income?arrow_forward3. How do earnings management practices affect the quality of earnings?arrow_forwardTopic: Payout Policy What is the advantage(s) of dividends against retained earnings?arrow_forward
- Topic: Payout Policy What are the drawback(s) of distributing dividends instead of retained earnings?arrow_forwardWhy are preferred dividends deducted from net income when calculating EPS? Are there circumstances when this deduction is not made?arrow_forwardExplain why there is a cost to using reinvested earnings; that is,why aren’t reinvested earnings a free source of capital?arrow_forward
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