Question 9.Act.3: Why might an increase in the dividend (D1) not lead to an in...

An increase in dividend payments will result in an increase in share price only if there is no consequential effect on the dividend growth rate. It is quite possible, however, that an increase in dividend will result in a fall in this growth rate, as there will be less cash to invest in the business. Thus, the beneficial effect on share price arising from an increase in next year’s dividend may be cancelled out by a decrease in future years’ dividends.