1. Facebook Inc., which has had a history of high growth and no dividends payments has announced that it will start paying dividends next year. How would you expect its stock price to react to the announcement and why?

2. KKR Auto is a small auto parts manufacturing firm, which has paid 1.00 in annual dividends each year for the last 5 years. KKR announces that dividends will increase to 1.25 next year. What would you expect the price reaction to be and why? If your answer is different from (a), explain the reasons for the difference.

3. Debenhams, a retailer of clothes announces a cut in dividends following a year in which both revenues and earnings dropped significantly due to Covid-19. How would you expect its stock price to react? Explain.

4. Under what assumptions can the Miller and Modigliani argument that dividends are irrelevant be made? What types of firms are most likely to fit these assumptions?

5. The directors of Tiger Head Ltd, a private telecommunications firm, are considering a proposed resolution for converting the business to a public company and listing its equity stock on the London Stock Exchange (LSE). The directors expect that the stock market listing can enhance Tiger Heads ability to raise large amounts of capital from the public. However, they fear that stock market inefficiencies could have a negative effect on the price of Tiger Heads equity stock.

Explain the three degrees of stock market efficiency, and how the price of Tiger Head is expected to move in each case.