The information content of a dividend increase generally signals that:
A) the payer has a one-time surplus of cash.
B) the payer has few, if any, net present value projects to pursue.
C) management believes earnings growth will be strong going forward.
D) the payer has more cash than it needs due to a decline in future orders.
E) dividends thereafter will be lower.

Question

Quizplus · Accepted Answer

A dividend increase typically signals that management believes earnings growth will be strong going forward. This is because a company is more likely to increase its dividend payments if it expects to generate sustainable profits in the future. A one-time surplus of cash (A) is unlikely to prompt a dividend increase, and a lack of net present value projects (B) may signal financial uncertainty rather than confidence. A decline in future orders (D) may lead to a decrease in dividends, not an increase. Dividends thereafter being lower (E) is not necessarily true and is not a reflection of the information content of a dividend increase.

The Information Content of a Dividend Increase Generally Signals That