If a firm's net income after dividends is greater than zero, then
I. its equity increases.
II. its retained earnings increase.
III. its liabilities decrease.
IV. its stock price increases.
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A. B. C. D.Explanation
The income not paid out as dividends becomes part of retained earnings, which is a component of equity. A firm's market value is not determined solely by its current book value but expected future earnings. If the current period's income falls short of expectations, then the stock price will fall even if nothing else changes simply because the unrealized part of the income was factored into the original price. A further complication arises if the market interprets the fall in income as an unfavorable signal about future earnings. Thus, while book value of the stock increases, the market value could increase or decrease.