Question

question 3 (1 point)
general electric announces that it is going to cut its dividends by $0.02 per share in the future. this, everything else remaining the same, will cause its current stock price to _______.
fluctuate
decrease
increase
remain the same

Explanation:

The dividend - discount model (DDM) states that the price of a stock \(P_0=\frac{D_1}{r - g}\) (for a constant - growth model), where \(D_1\) is the next - period dividend, \(r\) is the required rate of return, and \(g\) is the growth rate of dividends. When the company cuts its dividends (\(D_1\) decreases) and everything else (\(r\) and \(g\)) remains the same, according to the formula, the numerator of the fraction \(\frac{D_1}{r - g}\) gets smaller. A smaller numerator in a positive - valued fraction (since \(r>g\) for the DDM to be valid) results in a smaller value of the fraction. So, the stock price will decrease.

Answer:

B. Decrease