Assume That a Firm Has a Steady Record of Paying

question 67

Multiple Choice

Assume that a firm has a steady record of paying stable dividends for years.Market analysts had expected management to increase the dividend by 7.5% in the latest quarter.However,management announced a 15% increase in the current year's dividend.The market value of the stock rose 20% on the day of the announcement.Which of the following would best explain the stock market's reaction to the announcement?

• A) expectations theory
• B) dividend irrelevance theory
• C) residual dividend theory
• D) agency theory

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Definitions:

Corporation

A legal entity that is separate from its owners, providing them with limited liability protection, and has the ability to own assets, incur liabilities, and sell stock.

Repurchased

Refers to the act of a company buying back its own shares from the marketplace, which can affect the company's stock price and earnings per share.

Treasury Stock

Shares that were issued by a company and have been repurchased from the market, but not retired.

Stockholders' Equity

The owners' claim on the company's assets, calculated as the company's total assets minus its total liabilities; also known as shareholders' equity.