 Business
24 October, 01:31

# Bayside Marina just announced it is increasing its annual dividend from \$1.45 per share to \$1.48 per share effective immediately. If the dividend yield remains at its pre-announcement level, then you know the stock price:A. was unaffected by the announcementB. increased proportionately with the dividend increaseC. decreased proportionately with the dividend increaseD. decreased by \$0.03 per shareE. increased by \$0.03 per share

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1. 24 October, 02:40
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The correct option B, stock price increased proportionately with the dividend increase

Explanation:

To a rational investor, the price tag on a share is given by the expected dividend divided by the investor's rate of return.

To illustrate this further, the increase in dividend in percentage terms is calculated thus:

= (\$1.48-\$1.45) / \$1.45=2.07%

The divided has increased by 2.07%

Assuming investor's rate of return is 10%, we can calculate the price of the stock when dividend is \$1.45 as well as when it is \$1.48

price=\$1.45/0.1=\$14.5

price=\$1.48/0.1=\$14.8

The increase in price is computed thus:

(14.8-14.5) / 14.5=2.07%

There is no doubt that an increase in dividend of 2.07% brought about the same increase share price, hence choice of answer.