Skip to content

CMA Intermediate · Financial Management and Business Data Analytics · Dividend Decisions and Dividend Theories

Vihaan Ltd. has paid a dividend of ₹4 per share for years and its share trades at ₹80. It announces a dividend cut to ₹3 and the price falls to ₹76. Using only the data, what is the change in the dividend yield measured on the old price versus the new announcement, and the correct signalling interpretation? (Yield on old = 4/80; new yield = 3/76, rounded to two decimals.)

Old yield is 4/80 = 5.00% and new yield is 3/76 = 3.95%, so yield falls. The fall in price after a dividend cut agrees with signalling theory, because investors read the cut as management's signal of weaker future earnings, not as a tax-driven preference.

  1. AYield falls from 5.00% to 3.95%; the price drop is consistent with the cut being read as a negative signal about future earningsCorrect
  2. BYield falls from 5.00% to 3.75%; the price drop shows investors prefer capital gains
  3. CYield rises from 5.00% to 3.95%; the price drop reflects a positive signal
  4. DYield falls from 5.00% to 3.95%; the price drop contradicts signalling theory since lower dividends should raise value

Explanation

Old yield = 4/80 = 5.00%. New yield = 3/76 = 3.947%, i.e. 3.95%. Using 3/80 = 3.75% would wrongly keep the old price. A price fall following a dividend cut matches signalling theory, where cuts convey weaker prospects.

Did you get it right without looking?

One question tells you little. A timed set on Dividend Decisions and Dividend Theories shows your real accuracy, how long you take and where you lose marks.

Practise Dividend Decisions and Dividend TheoriesFree diagnostic mock

More Dividend Decisions and Dividend Theories questions