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:

Company

A legal entity formed by individuals, stockholders, or shareholders, with the purpose of operating for profit, engaging in commercial and industrial activities.

Straight-Line Amortization

A method of allocating the cost of an intangible asset evenly over its useful life.

Bond Payable

A long-term liability account that represents the amount a company owes to bondholders, to be repaid at a future date.

Issue Price

The issue price is the price at which a company's securities, such as stocks or bonds, are first offered for sale to the public when they are issued.