Different Divisions with Differing Lines of Business Use Different Costs

question 26

Multiple Choice

Different divisions with differing lines of business use different costs of capital because their cost of equity is different and also because the ________ could be different.

• A)optimal volatility
• B)optimal current ratio
• C)optimal asset mix
• D)optimal debt-equity ratio
• E)cost of debt

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Definitions:

Synergy

The belief that the combined strength and efficiency of two unified companies will exceed the total of their individual contributions.

Incremental Net Gain

The additional net profit earned as a result of a particular decision or action, taking into account all relevant costs and revenues.

Merger

The combination of two or more companies into a single corporate entity, with the newly formed organization often taking on a new name.

Strategic Alliance

A formal arrangement between two or more companies to undertake mutually beneficial business activities while retaining their independence.