Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

12. Stockholders' Equity

Retained Earnings

Financial Accounting

12. Stockholders' Equity

Retained Earnings

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Multiple Choice

If a firm takes steps that increase its expected future Return on Equity (ROE), how is its stock price most likely to be affected, assuming all other factors remain constant?

The stock price will likely decrease.

The stock price will likely increase.

The stock price will become more volatile but not change on average.

The stock price will remain unchanged.

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Verified step by step guidance

Understand the concept of Return on Equity (ROE): ROE measures a firm's profitability relative to shareholders' equity. It is calculated using the formula:

\frac{Net Income}{Shareholders' Equity}

. A higher ROE indicates the firm is generating more profit per dollar of equity invested.

Recognize the relationship between ROE and stock price: Stock prices are influenced by investors' expectations of future profitability. If a firm increases its expected future ROE, it signals higher profitability, which can attract more investors and increase demand for the stock.

Assume all other factors remain constant: The problem specifies that no other variables (e.g., market conditions, risk, or external economic factors) are changing. This simplifies the analysis to focus solely on the impact of increased ROE on stock price.

Analyze the impact of increased ROE: Higher expected future ROE suggests the firm will generate more returns for shareholders. This typically leads to higher investor confidence and increased stock demand, driving the stock price upward.

Conclude the most likely outcome: Based on the relationship between ROE and stock price, the stock price is most likely to increase when expected future ROE rises, assuming all other factors remain constant.