If a Firm Unexpectedly Raises Its Dividend Permanently and by a Substantial

question 74

Multiple Choice

If a firm unexpectedly raises its dividend permanently and by a substantial amount,the firm's stock price:

• A) should rise, given dividend discount models.
• B) should decline, given discounted cash flow analysis.
• C) will remain constant, due to market efficiency.
• D) remain constant, due to random-walk behavior.

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Definitions:

Tax Distortion

Describes how taxes can alter market behavior and lead to efficiency loss compared to an untaxed market.

Optimal Taxation

The theory or practice of determining the most efficient and effective way of levying taxes to generate government revenue with minimal economic distortion or inefficiency.

Excess Burden

The societal expense resulting from market inefficiency, which arises when supply and demand are not in balance.

Progressive

A term often used in the context of taxation or political ideology, indicating policies or stances that aim to redistribute resources from the more affluent to the less affluent.