Question

Assume that firm has a stead record of paying stable dividend for years. Market analysts had expected management to increase the dividend by 7.5% in the latest quarter. However, management announced a 15% increase in the current year's dividend. The market value of the stock rose 20% on the day of the announcement. Which of the following would best explain the stock market's reaction to the announcement?A. Expectations TheoryB. Dividend Irrelevance TheoryC. Residual Dividend TheoryD. Agency Theory

Answer 1

(A) Expectations Theory

Step-by-step explanation:

Expectations theory attempts to explain the term structure of interest rates by predicting what short-term interest rates will be in the future based on current long-term interest rates. This theory suggests that an investor earns the same amount of interest by investing in two consecutive one-year bond investments versus investing in one two-year bond today