Assume that a firm has a steady record of paying stable dividends for years. Market analysts had expected management to increase the dividend by 7.5% in the latest quarter. However, management announced a 15% increase in the current year's dividend. The market value of the stock rose 20% on the day of the announcement. Which of the following would best explain the stock market's reaction to the announcement?

a. expectations theory

b. dividend irrelevance theory

c. residual dividend theory

d. agency theory

Q39. A Bristal Boats, Inc. reports sales of $4,000,000, variable costs of $500,000, fixed operating costs of $1,250,000, and interest expense of $350,000. The corporation's EBIT is $3,250,000 and its marginal tax rate is 30%. If the corporation is able to increase its sales by 25%, then

a. its EBIT will increase by 25% and its EPS will increase by 25%.

b. its EBIT will increase by more than 25% and its EPS will increase by less than 25%.

c. its EBIT and EPS will both increase, but less than 25% due to fixed costs and taxes.

d. its EBIT will increase by more than 25% and its EPS will increase by more than the percentage increase in EBIT.