A firm that maintains a stable dollar dividend per share will generally not increase the dividend
unless
A) a stock split occurs.
B) the firm merges with another profitable firm.
C) the P/E ratio has increased steadily over the past 5 years.
D) the firm is sure that a higher dividend level can be maintained.
Question 2
Suppose the 360-day forward exchange rate is 1.657 dollars per British pound, and the current spot
rate is 1.625 dollars per British pound.
If the 360-day interest rate in the United States is 5 and the
360-day interest rate in Great Britain is 3, is the market in equilibrium according to the interest
rate parity theory?
A) No, because the forward premium on the pound is 2 while the interest rate in the United
States is 67 higher than the interest rate in Great Britain.
B) No, because the higher interest rate in the United States (2) implies that the forward
exchange rate should be 2 lower than the current spot rate.
C) Yes, because the forward premium on the pound (2) is exactly offset by the lower interest
rate in Great Britain.
D) Cannot be determined without knowing the amount of money being exchanged.
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