Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition)
Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition)
14th Edition
ISBN: 9780133740912
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
Question
Book Icon
Chapter 14, Problem 1OR
Summary Introduction

To determine: Whether the price change surprising.

Expert Solution
Check Mark

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.

Summary Introduction

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.

Expert Solution
Check Mark

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:

Returns earned by investor=(Market price of stock immediately after the stock ex-dividend+Amount of increase in dividendMarket price of stock  immediately before the ex-dividend)Market price of stock  immediately before the ex-dividend

Compute the return that an investor earned

Returns earned by investor=(Market price of stock immediately after the stock ex-dividend+Amount of increase in dividendMarket price of stock  immediately before the ex-dividend)Market price of stock  immediately before the ex-dividend=($129.67+$0.625$129)$129=$1.295$129=0.01 or 1%

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.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 14 Solutions

Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition)

Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Text book image
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:9781260013962
Author:BREALEY
Publisher:RENT MCG
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage
Text book image
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Text book image
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Text book image
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education