A corporation announces a significant increase in its annual dividend and its stock price increases
on the news. This could be explained most directly by
A) perfect capital markets. B) MMs indifference theorem.
C) residual dividend theory. D) bird-in-the-hand theory.
Question 2
Coyote Inc operates three divisions. One division involves significant research and development,
and thus has a high-risk cost of capital of 15.
The second division operates in business segments
related to Coyote's core business, and this division has a cost of capital of 10 based upon its risk.
Coyote's core business is the least risky segment, with a cost of capital of 8. The firm's overall
weighted average cost of capital of 11 has been used to evaluate capital budgeting projects for all
three divisions. This approach will
A) favor projects in the core business division because that division is the least risky.
B) favor projects in the research and development division because the higher risk projects look
more favorable if a lower cost of capital is used to evaluate them.
C) not favor any division over the other because they all use the same company-wide weighted
average cost of capital.
D) favor projects in the related businesses division because the cost of capital for this division is
the closest to the firm's weighted average cost of capital.
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