Plow back the funds in the expansion of its own operation

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Max Corporation has $10,000 in retained earnings that it has not distributed to its stockholders as dividends. It has a choice to invest the funds in a certificate of deposit at a bank at a guaranteed rate of 7 percent, or to plow back the funds in the expansion of its own operation.

If the expected return on the plow back is 12 percent, l0 percent, 8 percent, or 6 percent, what would be the best choice for the Max Corporation?

If the stockholders are risk averse, and on average need a 2 percent compensation for assuming risk, what choices should the firm make?

Reference no: EM13889110

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