Question

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

Answer 1

Answer:

III) Increase its gross margin

Explanation:

If the company increases its gross margin, it will have a direct impact on the company's net profit. The higher a company's net profit, the higher its value = higher stock price.

The only option that increases the value of the company is to increase its net profit, since:

• an increase in inventory will result in a lower stock price
• a decrease in the asset turnover ratio will result in a lower stock price
• the issuing of stock dividends will only increase the price of stock in the short run, later the price will adjust down since the company's book value will lower