Question

a. Suppose that Liquid Force, Inc.’s stock price consistently falls by an amount equal to one-half the dividend it pays on the payment date. Ignoring taxes, can you think of an investment strategy to take advantage of this information?

b. If you and many others pursued this strategy, predict what would happen to Liquid Force’s stock price on the dividend payment date.

c. Suppose that Liquid Force’s stock price consistently falls by an amount equal to twice the dividend payment on the payment date. Ignoring taxes, can you think of an investment strategy to take ad-vantage of this information?

d. If you and many others pursued this strategy, predict what would happen to Liquid Force’s stock price on the dividend payment date.

e. In an efficient market, ignoring taxes and transaction costs, how do you think stock prices will change on dividend payment dates?

f. Given that investors receive returns from common stock in the form of dividends and capital appreciation, do you think that in-creasing dividends will benefit investors in the absence of taxes and transactions costs?

Answer 1

Ans a )

If I am aware that the fall in the stock price of liquid Force Inc is more than the dividend the company is paying then I will go for Momentum strategy

Momentum strategy

In this strategy the investment is done experiencing the trend of the security. If the stock price continues to drop then probably short-selling is done. This is data driven approach of trading and looks pattern in stock prices for trading.

In the above scenario the stock price continues to drop till the payment date of dividend which is more than one half of the dividend price Hence will short sell the Liquid force Inc over here.

Ans b) If many people follow the same strategy then the liquid force stock price will fall on the payment date which could benefit my investment as I have shorted the stocks.

Ans c ) I will use momentum strategy here too as it is following the same pattern mentioned in question a hence please refer to answer mentioned for a

Answer d) Similarly in answer c here too the price of the stock will drop and benefit my investment.