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.

Question

Quizplus · Accepted Answer

The increase in dividends for both companies suggests they are trying to return excess cash to shareholders, possibly because they have positive NPV (Net Present Value) projects but face high flotation costs for raising new capital. This scenario explains why DAS, Inc.'s smaller dividend increase could lead to a stock price increase (seen as efficiently using capital) while AFB, Inc.'s larger increase might concern investors about its ability to fund future growth, leading to a stock price decrease.

AFB,IncAnd DAS,Inc