AFB,IncAnd DAS,Inc

question 70

Multiple Choice

AFB,Inc.and DAS,Inc.both paid a $2 per share dividend last year.This year,AFB,Inc.announces an increase to $3 per share while DAS,Inc.announces an increase to $2.50 per share.After the announcement,the price of DAS,Inc.stock increases and the price of AFB,Inc.'s stock decreases.Which of the following best explains this situation?

• A) The stock market is irrational.
• B) AFB, Inc. had higher agency costs than DAS, Inc. prior to the announcement.
• C) Both companies need to raise capital for positive NPV projects, and flotation costs are high.
• D) Capital markets are perfect.

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Definitions:

Net Sales

Net sales are the total revenue from goods and services sold by a company, after deducting returns, allowances for damaged or missing goods, and discounts.

Accounts Receivable

Money owed to a business by its clients (customers) for goods or services that have been delivered but not yet paid for.

Net Income

The total earnings of a company after subtracting all expenses, including taxes, from its total revenues.

Cash Flow

The total amount of money being transferred into and out of a business, especially concerning liquidity.