Question

Dividend Policy

a) The information content of dividend announcement suggests that dividend increases signal positive information about the firm. However, when Microsoft Corp paid its first dividend, its share price fell. Give two reasons for the stock market reaction to Microsoft’s first dividend announcement.

b) Why would you expect start-up firms or high growth firms to pay little or no dividends?

c) Explain why share repurchases announcements usually elicit a positive market reaction?

Answer 1

Answer a) Two reasons for the stock market reaction to Microsoft’s first dividend announcement can be,

• Declared Dividend amount is less than the expected from investors
• Share price after ex dividend is calculated as , Market price= price - dividend paid

Answer b) As the start up or high growth firm can use the dividend fund to full fill its operational need .

Answer c) Share repurchase increase the confidence of promoters in their business , which gives a positive signal to investors. The activity also provide information about increase in surplus income to company .