Killnum Corp. announces that the dividend for the next year will be $2.50 per share rather than the originally expected $1.50 per share. From then on, it is expected that dividends will resume their
Historical constant growth rate of 5% per year. What would you expect to happen to the price of the
Stock? Ignore any tax effects.

Question

Quizplus · Accepted Answer

When a company announces a dividend increase, the stock price is likely to rise but not by the full amount of the dividend increase. This is because the dividend increase represents a one-time event, while the price of the stock reflects the long-term expectations for the company. In this case, the price of the stock is likely to rise by less than 100% because the 5% growth rate is already factored into the stock price, and the increased dividend payout is not large enough to justify a doubling of the stock price.