If a firm unexpectedly raises its dividend permanently and by a substantial amount,the firm's stock price:
A) should rise, given dividend discount models.
B) should decline, given discounted cash flow analysis.
C) will remain constant, due to market efficiency.
D) remain constant, due to random-walk behavior.

Question

Quizplus · Accepted Answer

According to the dividend discount model, an increase in dividend leads to an increase in the present value of the stock, which would lead to an increase in the stock price. Therefore, if a firm unexpectedly raises its dividend permanently and by a substantial amount, the firm's stock price should rise.

If a Firm Unexpectedly Raises Its Dividend Permanently and by a Substantial