Question

When SW International declared a dividend of $20,000,000, its market value increased from $8 billion to $8.5 billion. However, it lost a chance to reinvest $20,000,000 in the research and development of a new product which would have earned a profit of $200 million. Thus, this $200 million is referred to as SW International's [...]

Opportunity cost

Answer 1

The answer is correctly stated as opportunity cost

Step-by-step explanation:

Opportunity cost is simply opportunity missed out because one chooses a different course of action.

It pure economics terms it is cost of an alternative forgone,however in Finance, it is extended to capture benefits,profits,advantages missed for sticking to a different course of action,or even investing differently.

Specifically,SW's action of declaring dividends of $20 million meant that it could not invest the $20 million in a project whose return is $200 million, hence the benefit missed is the $200 million.

In other words, SW's opportunity cost is the $200 million.

Answer 2

Opportunity costs

Step-by-step explanation:

Opportunity costs refers to the value of the best alternative use of resources that is forgone.

Put simply, opportunity cost is the gain, benefit or income that an investor, company, or individual did not receive because it chose one alternative over another.

From the question, the profit of $200 million which SW International would have earned is an opportunity cost because it chose to declare a dividend of $20,000,000 over investing the same amount on the research and development of a new product.

Thus, this $200 million is referred to as SW International's opportunity cost.