What Stock Price Reaction Would You Expect from a Firm

question 114

Multiple Choice

What stock price reaction would you expect from a firm that unexpectedly raises its dividend permanently and by a substantial amount?

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

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Definitions:

Buyers

Individuals or organizations that purchase goods or services for personal use, resale, or as inputs in the production of other goods.

Sellers

Individuals or entities that offer goods or services for sale in the marketplace.

Progressive

A term describing a tax system where the tax rate increases as the taxable amount increases, or broadly referring to policies or principles aiming at promoting social advancement.

Regressive

A term often used in taxation that describes a situation where the tax rate decreases as the taxable amount increases, placing a heavier burden on lower-income individuals.