Question

A company with stable earnings announces a sudden, large cut in dividend despite strong retained earnings and no capital expenditure needs. Which interpretation is most consistent with dividend signalling theory and market practice?

A Market will view it positively—more cash for future projects.
B Market may interpret cut as signal of future earnings weakness, causing a negative reaction.
C No effect—dividends are irrelevant per Modigliani-Miller under all conditions.
D Market will only react if share buybacks announced simultaneously.
E The cut will cause immediate reclassification of debt to equity by lenders.
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