Purple Sage Producers Inc. is an oil drilling company. The company paid a dividend of $1.75 last year, and, in the past, its dividend has increased steadily by about 4% a year. Purple Sage just announced that its dividend will increase to $2.50 this year, and its share price rose from $30 per share to $33 per share immediately after the announcement.
Which of the following best explains why Purple Sage's stock price increased as it did?
a. The signaling hypothesis
b. Dividend irrelevance theory
c. The clientele effect
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