Which of the following statements about the cost of capital

Which of the following statements about the cost of capital is most correct?

Solution

When the company cannot provide growth rate to shareholders which is equal to or more than the growth rate they can earn outside, they should pay out earnings as else share price will fall.

Hence, correct option is (D) For-profit firms should distribute net income through dividends if they cannot earn as much as stockholders could in similar risk investments.