Question

Scott works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by US$1.50 a share during the next year. He realizes that this increase is contingent on pending legislation that would, if enacted, give Walkton a substantial tax break. The US representative for Walkton's home district has told Scott that, although she is lobbying hard for the bill and prospects for its passage are favorable, concern of the US Congress over the federal deficit could cause the tax bill to be voted down. Walkton Industries has not made any statements about a change in dividend policy. Scott writes in his research report, 'We expect Walkton's stock price to rise by at least US$8.00 a share by the end of the year because the dividend will increase by US$1.50 a share. Investors buying the stock at the current time should expect to realize a total return of at least 15% on the stock.' According to the Standards: What is the reason for Scott's expectation of a rise in Walkton's stock price?

1) The pending legislation is expected to give Walkton Industries a substantial tax break.
2) The US representative for Walkton's home district is lobbying hard for the bill.
3) Walkton Industries has not made any statements about a change in dividend policy.
4) Investors buying the stock at the current time should expect to realize a total return of at least 15% on the stock.

Answer 1

The reason for Scott's expectation of a rise in Walkton's stock price is the anticipated substantial tax break from pending legislation, which would likely lead to an increased dividend.

Step-by-step explanation:

Scott's expectation of a rise in Walkton's stock price is primarily due to the pending legislation that is expected to provide Walkton Industries a substantial tax break. If the legislation is enacted, the company is likely to increase its dividend by US$1.50 a share due to the enhanced profitability resulting from the tax advantages. The statement from the US representative suggests that the chances of passing the tax bill are favorable despite concerns over the federal deficit. This potential increase in dividend is attractive to investors as it directly impacts the total return they can expect from the stock, which includes both dividends and capital gains.