Section B (2 Mark)Why do share prices usually drop when news about decline in a...

Because a reduction in a earnings means that the firm has less money with which to pay dividends and therefore the market fears a reduction in the company’s future dividends.

Because the share market anticipates that a decreased level of earning power might be the indicator of default and perhaps even bankruptcy.

The statement is false. Share prices do not usually react about current earnings.

Both (a) and (b) are true