A Corporation Has Been Steadily Losing Money on One of Its

question 24

Multiple Choice

A corporation has been steadily losing money on one of its product lines. The factory used to produce that brand cost €20 million to build 10 years ago. The firm now is considering an offer to buy that factory for €15 million. Which of the following statements about the decision to sell or not to sell is correct?

• A) The firm should turn down the purchase offer because the factory cost more than €15 million to build.
• B) The €20 million spent on the factory is a sunk cost that should not affect the decision.
• C) The €20 million spent on the factory is an implicit cost, which should be included in the decision.
• D) The firm should sell the factory only if it can reduce its costs elsewhere by €5 million.

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Definitions:

Common Share

Equity securities that represent ownership in a corporation, providing voting rights and a share in the company's profits via dividends.

Stockholders' Equity

The residual interest in the assets of a corporation remaining after deducting its liabilities, representing the ownership interest of the shareholders.

Dividend Yield

Dividend Yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price, indicating the return on investment from dividends alone.

Cash Dividends Per Share

The amount of cash distributed to shareholders per share out of a company's earnings.