Question

Which of the following statements about shares is correct, all other things being equal?

Select one:

a. Dividends to ordinary shareholders are contractual obligations.

b. Dividends to preference shareholders are contractual obligations.

c. A lower required rate of return implies a lower share value.

d. A higher dividend growth rate implies a higher share price.

Answer 1

Part A:

Dividends will be paid to share holders at the discretion of directors. If the amount proposed by directors is approved by share holders, they are eligible to receive the dividend. Thus there is not contraactual obligation to pay dividend to share holders.

Part B:

Preference share holders will have preferential rights over Equity holders to pay dividend and repayment of capital.

Thus there is no obligation to pay Preference share holders compulsorily.

Part C:

Share Proce according to Gordon Model:

P0 = D1 / [ Ke - g ]

As the required rate is less, Share Price will increase.

Thus the statement is wrong

Part D:

Share Proce according to Gordon Model:

P0 = D0 (1+g) / [ Ke - g ]

As growth rate is more, Share Price will increase.

Thus the statement is correct