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Dividends: affect to stock price, policy of smoothing, reducing dividend, new shares

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An increase in dividends might not increase price and may actually decrease stock price if:
A)the dividend increase cannot be sustained.
B)the firm does not maintain an exact dividend payout ratio.
C)the firm has too much retained earnings.
D)markets are weak-form efficient.

A policy of dividend "smoothing" refers to:
A)maintaining a constant dividend payout ratio.
B)keeping the regular dividend at the same level indefinitely.
C)maintaining a steady progression of dividend increases over time.
D)alternating cash dividends with stock dividends.

What is the most likely prediction after a firm reduces its regular dividend payment?
A)Earnings are expected to decline.
B)Investment is expected to increase.
C)Retained earnings are expected to decrease.
D)Share price is expected to increase.

Under the idealized conditions of MM, which statement is correct when a firm issues new stock in order to pay a cash dividend on existing shares?
A)The new shares are worth less than the old shares.
B)The old shares drop in value to equal the new price.
C)The value of the firm is reduced by the amount of the dividend.
D)The value of the firm is unaffected.

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Solution Preview

An increase in dividends might not increase price and may actually decrease stock price if:

A) The dividend increase cannot be sustained.
Dividend drops have a much greater negative impact on stocks compared to a dividend increase. If the new dividend was intended as permanent and cannot be maintained, the stock can have a negative reaction. Under MM, the dividend itself should not increase firm value. Also, by increasing dividends, the firm may be indicating that it has few profitable ...

Solution Summary

In a 336 word solution, the response explains each of the answers in a full paragraph.