If You Were to Argue That the Firm's Cost of Equity,r_s,increases

question 63

Multiple Choice

If you were to argue that the firm's cost of equity,r_s,increases as the dividend payout decreases,you would be making an argument ____ with MM's dividend irrelevance theory,and ____ with the theory that investors prefer dividends received in the current period rather than capital gains received in the future.

• A) consistent;consistent
• B) inconsistent;consistent
• C) consistent;inconsistent
• D) inconsistent;inconsistent
• E) The argument above does not make sense;neither theory involves the cost of equity capital.

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Definitions:

Short-Run Exposure

Refers to the degree to which a company's financial performance is affected by fluctuations in foreign exchange rates over a short period.

Home Currency Approach

A method of currency risk management that converts all foreign currencies and related activity into the domestic currency of the company for analysis and reporting.

Foreign Currency Approach

A strategy or method for managing the risks and effects of foreign exchange rate fluctuations on investments or business transactions.

Capital Budgeting

The process a business undertakes to evaluate potential major projects or investments, such as new machinery, expansion of production or new facilities.