1. Dividend policy Aa Aa Vick Shipping paid a dividend of $1.50 last year, and i
ID: 2653933 • Letter: 1
Question
1. Dividend policy Aa Aa Vick Shipping paid a dividend of $1.50 last year, and its dividend has increased steadily by about 4% a year. Vick just announced that its dividend will increase to $2.10 this year, and its stock price rose from $26 to $28 immediately after the announcement. Which of the following best explains why the price increased as it did? O The signaling hypothesis O The residual dividend model O The clientele effect O M-M dividend irrelevance Which class of investors is more likely to be pleased by Vick's dividend announcement? O Investors with low tax rates who depend on current dividend income for living expenses O Investors with high tax rates who don't depend on current dividend income for living expenses Suppose a firm generates a lot of cash but has limited investment opportunities. Is this stock more likely to be a utility stock or a technology stock? And is the stock likely to have a high or low dividend yield? O Probably a utility stock that has a low dividend yield O Probably a utility stock that has a high dividend yield O Probably a technology stock that has a high dividend yield O Probably a technology stock that has a low dividend yieldExplanation / Answer
1. The clientele effect, since the rise in dividend is directly linked to the shareholders.
2. Investors with high tax rates who do not depend on the current dividend income for living expenses is more likely to benefit by Vick's decision, since although the dividend has only gone up marginally, there is likely to be a further increase therein, and consequently the share price may also go up. This can benefit them, since the long term investment made will reap higher returns on sale.
3. Probably a technology stock having high dividend yield
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