dividend question

CFA Level II
#1

Alumi Co. pays a dividend. Which of the following events is least likely to cause its stock price to fall? Alumi Co.: A) issues more common stock. B) announces that its next quarterly dividend will decline. C) increases its debt to 75% of capital, the level of earnings per share maximization. D) pays its quarterly dividend.

#2

d stock price falls on the ex-dividend date

#3

C.

#4

D issue more stock, bad signal/dilution, next divs will decline- bad signal, EPS maximized is a good thing, pays the div- no effect on stock px. stock px down on ex date, 2 days later record, when it pays in 2 weeks or so, no big thang.

#5

Least likely… C. Stock price should fall under A, B, or D.

#6

C

#7

Go with C

#8

I’ll go with D.

#9

A

#10

D

#11

100% D. The stock price falles on the X-dividend date and not on the payment date

#12

C. (I’m assuming they weren’t splitting hairs as dinesh views it).

#13

C

#14

Your answer: C was incorrect. The correct answer was D) pays its quarterly dividend. Stock prices tend to fall on the ex-dividend date, not on the pay date. Announcing a dividend cut is a negative signal to investors. While a stock repurchase is a positive signal to investors, a stock offering is a negative signal. While a higher debt level may maximize Alumi Co.’s earnings, that level is not likely to maximize the firm’s price since it is likely to be associated with a higher level of risk. What a tricky question… Nice work dinesh…

#15

I’m not sure how maximizing Earnings is going to make the price fall… Does anybody else?

#16

The question asked “least likely to make prices fall”.

#17

A- Dilution, out B - Stock is expectation of future, decrease dividend depresses price, out D - Ex-Dividend, pie gets smaller. out C - Pie gets biger, can use new borrowings to pay dividends. Go for it.

#18

I think its C

#19

CFA_guy_shooter Wrote: ------------------------------------------------------- > I’m not sure how maximizing Earnings is going to > make the price fall… Does anybody else? If you increase the debt capital you might be able to maximise your EPS but not necessarily maximise the value of firm. Instead its possible that due to high leverage the value of the firm might go down as risk for equity investor will increase. Important thing is question doesn’t mention that 75% debt is for minimizing WACC or for maximizing value of firm.

#20

Also, you could maxze eps but increase discount enough to decrease value from a DCC pespective. kabhii Wrote: ------------------------------------------------------ > CFA_guy_shooter Wrote: > -------------------------------------------------- > ----- > > I’m not sure how maximizing Earnings is going > to > > make the price fall… Does anybody else? > > If you increase the debt capital you might be able > to maximise your EPS but not necessarily maximise > the value of firm. > > Instead its possible that due to high leverage the > value of the firm might go down as risk for equity > investor will increase. Important thing is > question doesn’t mention that 75% debt is for > minimizing WACC or for maximizing value of firm.