Question

In financial capital markets without any frictions (e.g., taxes, financial distress costs, information asymmetry, transaction costs, security mispricing, etc.), which one of the followings is most likely to affect the equity value of a firm?

Group of answer choices

A. conducting a strategic reorientation in the product market

B. changing the dividend policy of the firm

C. changing the term structure of debt of the firm

D. using derivatives to hedge the firm’s short-term currency exchange risks

Answer 1

The Most Likely that affects the stock market without any friction is "Changing the dividend policy of the firm".

When a firm announces dividends it decreases the equity price because of the fall in underlying stocks.

When a firm announces dividends many investor prompted to buy equity share because of the dividends they will recieve in the future. So, they may purchase the equity at higher price which increases the equity price but when the dividends are announced the stock price may pull down because of the selling pressure mainly from the new investors who purchased the share for the dividends.

The changing structure of debt and using derivaties to hedge the form short-term currency exchange risk may not have direct effect on Equity value of a firm because they are not directly related to them.

conducting a strategic reorientation in the product market could increase the profitability of the company thus the lucrativeness of equity holder in the company but it may not have direct impact on the price compared to dividends.