Question

'Tangy Beverages Ltd.' was known for its popular tangy fruit drinks. It had recently introduced a new range of fruit drinks that became an instant hit among consumers and led to a significant increase in the company's profits. As a result, the Board of Directors wanted to declare a higher dividend for the year. The Chief Finance Officer suggested that they should evaluate the impact of dividend on the share price of previous years before taking a decision. An analysis was done, which showed how the company's share price had risen in previous years whenever the dividend was increased. On the other hand, even a small decrease in dividend had led to a noticeable dip in the share price. Which of the following factors affecting dividend decision was suggested by the Chief Finance Officer to the Board of Directors in the above case?

• A. Access to capital market
• B. Stock market reaction
• C. Shareholders preference
• D. Cash flow position

Hint:

Remember: Anytime a case study links a financial decision directly to the rise or fall of "share prices," the answer is "Stock market reaction."

Answer 1

The Correct Option is B

Step 1: Concept
Factors affecting Dividend Decisions.

Step 2: Meaning
Dividend decisions determine how much of the company's profit is distributed to shareholders, which can significantly influence the market's perception of the company's value.

Step 3: Analysis

• The CFO specifically asked to evaluate the impact of the dividend on the company's share price.

• The analysis proved that dividend increases raised the share price, while decreases caused a noticeable dip.

• This direct correlation between corporate dividend announcements and share price fluctuations is the textbook definition of analyzing market reactions.


Step 4: Conclusion
The CFO's focus on share price movements directly identifies the "Stock market reaction" factor.

Final Answer: (B)