If a company's cost of capital increases unexpectedly, which of the following actions will help it maintain or increase its stock price:
I. Decrease its asset turnover
II. Increase its inventory
III. Increase its Gross margin
IV. Issue a stock dividend
A) I and IV
B) II and III
C) III
D) I

Question

Quizplus · Accepted Answer

If a company's cost of capital increases unexpectedly, it will need to focus on increasing its profitability to maintain or increase its stock price. Increasing gross margin (III) is the best way to achieve this. Decreasing asset turnover (I) would reduce the company's efficiency, and increasing inventory (II) would tie up more capital, worsening the impact of higher cost of capital. Issuing a stock dividend (IV) would not necessarily improve profitability, and may dilute the value of existing shares. Therefore, only III (Increase its Gross margin) is the best choice.

If a Company's Cost of Capital Increases Unexpectedly, Which of the Following