Share Price Changes Around the Time of Announcements of Dividend

question 11

Multiple Choice

Share price changes around the time of announcements of dividend changes are positively related to the change in dividends.This evidence may not invalidate the dividend irrelevance theorem because:

• A)investors are indifferent between capital gains and dividend income.
• B)debt is not necessarily affected by such announcements.
• C)share prices revert back to pre-dividend levels following the announcement.
• D)it is not the dividend payments that determine the value of shares but information about the future cash flows that is conveyed by the announcement.

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Definitions:

Initial Cost

The initial amount of money invested or spent to purchase or start a new project, asset, or business, excluding ongoing or future costs.

Mutually Exclusive

Mutually exclusive describes a scenario where the occurrence of one event makes the occurrence of another impossible.

Unequal Lives

Refers to comparing projects or assets with different durations or expected lifetimes to make investment or capital budgeting decisions.

Equivalent Annual Annuity

A method used in capital budgeting to compare the profitability of investments with different lifespan by converting them into an equivalent annuity.