Question

Which of the following is a possible market reaction to a company’s announcement that it will...

Which of the following is a possible market reaction to a company’s announcement that it will increase it’s quarterly dividend?

Select one:

a. The share price may decrease because the increased dividend signals that future earnings will be higher than the market currently expects.
b. All of these answers.
c. The share price may increase because the increased dividend signals that future earnings will be higher than the market currently expects.
d. The share price may increase because the increased dividend signals that future earnings will be lower than the market currently expects.
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Homework Answers

Answer #1

When the company announces that the dividend on the shares shall increase the shareholders may find it promising for their near future as well, Better dividends indicate that the company is in a good financial health and is earning good; even more than the market expects it to earn. They would want to keep associated or even want to buy more shares; since current and new shareholders would want to buy more shares this will lead to decrease in the price of the shares. As when the demand increases more than the supply the price falls. So, a possible market reaction to a company’s announcement that it will increase it’s quarterly dividend will be increase in earning expectation and decrease of price.

So, the correct answer is Option a- The share price may decrease because the increased dividend signals that future earnings will be higher than the market currently expects.

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