Market absorption of news announcements

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Australian investors are hurting after Telstra, one of the most widely-held stocks, slumped nearly 8% in early afternoon trading on Wednesday after the 'Telco' cut its dividend. The stock fell to a five year low after Australia's dominant Telco said total dividends in the 2019-2020 financial year would be 22 Australian cents, a 30% drop from the 31 Australian cents payout in the 2018-2019 financial year. The company also said that it would no longer have a payout ratio of 100%, instead lowering its 'targeted' dividend payout range to between 70% and 80%'. (www.barrons.com 16 August 2019)

Required:

With reference to both share valuation methods and market absorption of news announcements, explain why investors reacted to the company's announcement with such a dramatic drop in the Telco's share price/value.

Reference no: EM133062169

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