The balance sheet for Universal Images plc is shown here in market value terms. There are 5,000 shares outstanding.

€175,000

The company has declared a dividend of €1.5 per share. The equity goes ex dividend tomorrow.

1) Ignoring any tax effects, what are the shares selling for today?

2) Ignoring any tax effects, what will they sell for tomorrow?

3) What will the market value balance sheet look like after the dividends are paid?

4 Critically discuss the reasons why in the real-world we observe firms paying dividends instead of retaining cash. We also observe positive stock price responses to the announcement of dividend increases.