Question

How retained earnings lead to increase in the market price of the equity shares of a company? Explain with Examples.

Answer 1

Retained earnings are that part of the profits of the company which the company keeps with itself for its further expansion rather than distributing it as dividend to the shareholders. Now, if a company retains a higher proportions of its profits as its retained earnings, it increases its growth possibilities. A growing company is expected to declare higher dividends in future by the investors. This leads to an increase in market price of the shares.