MB a large computer company will pay a year-end dvidend of Computer stocks curre
ID: 1171633 • Letter: M
Question
MB a large computer company will pay a year-end dvidend of Computer stocks currently provide an expected rate of return of 199 $2.50 per share. a. If the stock is selling at $55 per share, what must be the market's expectation of the dividend growth rate? (Round your answer to 2 decimal places.) rowth rate 96 b. If dividend growth forecasts for MBI are revised downward to 7% per year, what will happen to the price of MBI stock? O The price will fall. The price will rise. c. What (qualitatively) will happen to the company's price-earnings ratio? OThe price-earnings ratio will rise. The price-earnings ratio will fall.Explanation / Answer
g = Ke - ( D1 / p0 )
= 19% - ( 2.50 / 55 )
= 19% - 4.55%
= 14.45%
B:
There is direct relationship between Price & growth rate, if growth rate is decreased, the price is also decreased.
C: PE ratio = MPS / EPS
Based on reduction in growth rate EPS wont change, at the same time MPS is decreased ( as there is direct relationship between MPS & g)
Thus PE ratio will fall as growth rate is dropped.
Pls comment, if any further assistance is required.
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