To determine: Whether the price change surprising.
Explanation of Solution
Determine whether the change in price was surprising:
The ex-dividend date is two days before the date of record that will be 15th May. In the usual case, the stock price will fall by the amount of the dividend when it goes ex-dividend. It is because the stock price indicates that the firm has no claim on the cash used to pay the dividend. Later, the W Company’s stock price raised after it went ex-dividend. Therefore, this sudden change in the market price was surprising.
To determine: The return that an investor would earn.
Introduction:
Return is a loss or gain incurred on the investment made by the investors. It is expressed in terms of percentage.
Explanation of Solution
Given information:
W Company has decision to raise the dividend to $0.625 per share. The market price of W Company’s before the ex-dividend is $129 and the market price of stock immediately after the stock ex-dividend is $129.67.
The formula to compute the return that an investor earned is as follows:
Compute the return that an investor earned
Hence, the return that an investor would earn is 1 percent. This return is not a large return. However, in order to incur this required return the investor has to invest capital for one day.
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Chapter 14 Solutions
Principles of Managerial Finance
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