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Question
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.
Answer
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