Analyzing the Impact of Dividend Policy
McDonald and Associates is a small manufacturer of electronic connections for local area networks. Consider three independent situations.
Case 1: McDonald increases its cash dividends by 50 percent, but no other changes occur in the company’s operations.
Case 2: The company’s income and cash flows increase by 50 percent, but this does not change its dividends.
Case 3: McDonald issues a 50 percent stock dividend, but no other changes occur.
Required:
1. How do you think each situation would affect the company’s stock price?
2. If the company changed its accounting policies and reported higher net income, would the change have an impact on the stock price?
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