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?
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12. Stockholders' Equity
Retained Earnings
Multiple Choice
An accumulated deficit means a company has ______.
A
more assets than liabilities
B
a negative balance in retained earnings
C
paid out more dividends than net income earned
D
a surplus in contributed capital
Verified step by step guidance1
Understand the term 'accumulated deficit': It refers to a situation where a company's retained earnings account has a negative balance. Retained earnings represent the cumulative net income of a company that has not been distributed as dividends.
Analyze the options provided: The correct answer should align with the definition of an accumulated deficit, which is directly related to retained earnings and not other accounts like assets, liabilities, or contributed capital.
Option 1: 'More assets than liabilities' - This refers to the financial position of a company (its balance sheet) and does not relate to retained earnings. Eliminate this option.
Option 3: 'Paid out more dividends than net income earned' - While this could contribute to an accumulated deficit, it is not the definition of the term itself. Eliminate this option.
Option 4: 'A surplus in contributed capital' - Contributed capital refers to funds received from shareholders in exchange for stock, which is unrelated to retained earnings. Eliminate this option. The correct answer is: 'A negative balance in retained earnings.'
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