What is the information effect associated with dividends? Why does it occur?
What will be an ideal response?
The informational content of dividends says that managers use unexpected dividend changes to signal expectations of
future earnings. This signaling is necessary due to informational asymmetries between managers and shareholders.
Managers "signal" private information by changing dividends. An unexpected increase in dividends is a positive signal
of a manager's belief in future earnings; an unexpected decrease is a negative signal of a manager's forecast of future
earnings.
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Sarakose Co. is a U.S. company with sales to Canada amounting to C$5 million. Its cost of materials attributable to the purchase of Canadian goods is C$7 million. Its interest expense on Canadian loans is C$5 million. The dollar value of Sarakose's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of its cash flows would ____ if the Canadian dollar appreciates.
a. increase; increase b. decrease; increase c. decrease; decrease d. increase; decrease e. increase; be unaffected
A debit has an unfavorable effect on an account
Indicate whether the statement is true or false