Question

For ABC Corp. paying a constant annual dividend, its stock price decreased. Which is expected for ABC Corp.: 1. Its dividend yield to decrease Its dividend yield to increase Its capital gains yield to decrease Its capital gains yield to increase III. IV. Select one: a. ll only O b. II and IV only O c. I and III only d. I only

Answer 1

Solution :

Option a - II Only

Explaination

As the company follows the practice of constant annual dividend payout, it will attract more and more investors. Constant annual dividend payout also reflects the strong financial stability of the company. Due to hike in investment, there is strong probability in the increase of profits resulting in increase of dividend yield. With respect to capital gain yield, as stated that stock prices decreases due to constant dividend payout it is obvious that in future the stock price may go below original purchase price and the stock will not be in position to generate capital gain yield.