What stock price reaction would you expect from a firm that unexpectedly raises its dividend permanently and by a substantial amount?
A) Price should rise, given dividend discount models.
B) Price should decline, given discounted cash flow analysis.
C) Price will remain constant, due to market efficiency.
D) Price will remain constant, due to random-walk behavior.

Question

Quizplus · Accepted Answer

According to the dividend discount models, an increase in dividend amount would increase the present value of the stock, and thus, the stock price should rise.

What Stock Price Reaction Would You Expect from a Firm