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: Identify what is being asked.
The question asks us to identify the specific factor affecting the dividend decision that the CFO suggested the Board should evaluate before finalising the dividend.
Step 2: Recall the factors affecting dividend decisions.
Key factors include: Cash flow position, Stability of earnings, Growth opportunities, Shareholders' preference, Access to capital markets, and Stock market reaction.
Step 3: Identify the CFO's specific suggestion.
The CFO suggested evaluating the impact of dividends on the company's share price based on data from previous years, before declaring a higher dividend this year.
Step 4: Analyse the data found after the CFO's suggestion.
The analysis showed a clear pattern: whenever dividends went up, the share price rose. Whenever dividends went down even slightly, the share price noticeably dipped. This direct link between dividend announcements and share price movement is the core idea behind the factor called stock market reaction.
Step 5: Eliminate the other options.
Cash flow position is about whether the company has enough liquid cash to pay dividends. Access to capital market is about a company's ability to raise money from external markets. Shareholders' preference relates to the income needs of shareholders. None of these match the CFO's focus on share price movement.
Step 6: Confirm the answer.
The CFO's advice was rooted in understanding how the market (reflected in share prices) reacts to changes in the dividend, which is precisely the Stock market reaction factor.
\[ \boxed{ \text{(B) Stock market reaction} } \]