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12.How is it possible that a firm can create value by selling a business unit? Select...

12.How is it possible that a firm can create value by selling a business unit?

Select one:a. If the business is unprofitable, selling it will increase earnings per share.b. If the business uses the proceeds to repurchase stocks, reverse dilution occurs and market values increase.c. It is not possible. Business lost is value lost.d. If the business unit has a negative NPV with respect to its market value, shareholders are wealthier with the market value than they are with the future cashflows.

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Answer #1

Answer is d

A value is created for shareholders when the net present value is higher with future cash flows. Elimination of unprofitable business units increases the future cash inflows. Hence shareholders are wealthier with the market value than with the future cash flows occurring from elimination of unprofitable unit. The first 3 options do not help in creating shareholders value since the net present value is not compared with market value of the business unit. So answer is Option d.a

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