Which of the following statements regarding the impact of an increase in dividends on the share price of a firm is MOST true?

A. The share price of the firm is likely to go down on the announcement date due to the signaling effect and go up by the amount of the dividend on the ex-dividend date.

B. The share price of the firm is likely to go up on the announcement date due to the signaling effect and go up by the amount of the dividend on the ex-dividend date.

C. The share price of the firm is likely to go down on the announcement date due to the signaling effect and go down by the amount of the dividend on the ex-dividend date.

D. The share price of the firm is likely to go up on the announcement date due to the signaling effect and go down by the amount of the dividend on the ex-dividend date.

Solutions

Expert Solution

Signaling effect on the stock is when the dividends are announced has a positive effect on the stock price and the price is likely to go down on the ex dividend date because the dividends are actually taxed on the ex dividend date. This causes the price to fluctuate over the ex dividend and the dividend date.

Option D. The share price of the firm is likely to go up on the announcement date due to the signaling effect and go down by the amount of the dividend on the ex-dividend date.

Harshini answered 2 years ago

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