The Problem with Spinning Is That It May ________ the Cost

question 6

Multiple Choice

The problem with spinning is that it may ________ the cost of capital to a firm and thus ________ the efficiency of the capital market.

• A)increase;increase
• B)increase;decrease
• C)decrease;increase
• D)decrease;decrease

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Definitions:

Earnings Retention Ratio

The earnings retention ratio, also known as the plowback ratio, measures the percentage of net income that is retained in the company rather than being paid out as dividends.

Market Capitalization Rate

Market capitalization rate, or "cap rate", is used in evaluating and comparing the expected returns on investments in the equity market, reflecting the cost of capital for a company.

P/E Ratio

The price-to-earnings ratio, a valuation metric calculated by dividing the current market price of a stock by its earnings per share.

Dividend Plowback Ratio

The portion of a company's earnings that is not distributed as dividends but is reinvested in the business, also known as the retention rate.