A small biotechnology research corporation has been experiencing losses for the first three years of its existence, and thus has a negative balance in retained earnings. The corporation’s stock price, however, is $1 per share. Which of the following statements is most correct?
Select one:
a. The required return on the stock will be small because the company has very few assets.
b. Investors believe the stock is worth $1 per share because future earnings (and cash flows) are expected to be positive.
c. The corporation’s accountants must have made a mistake because retained earnings may not be negative.
d. Investors are irrational to pay $1 per share when earnings per share have been negative for three years.