The explicit forecast period must be long enough for the company to reach a steady state.Which of the following is NOT a desirable property of that steady state?
A)The growth rate rises above the required return on capital.
B)The company earns a constant rate of return on existing capital.
C)The company earns a constant rate of return on new capital invested.
D)The company reinvests a constant proportion of its operating profits into the business each year.

Question

Quizplus · Accepted Answer

If the growth rate rises above the required return on capital, the company may be taking on too much risk or investing in projects that are not profitable. A desirable steady state would include earning a constant rate of return on existing and new capital invested, and reinvesting a constant proportion of its operating profits into the business each year to ensure sustained growth.

The Explicit Forecast Period Must Be Long Enough for the Company