a. Computer stocks currently provide an expected rate of return of 16%. MBI, a l

Question

a. Computer stocks currently provide an expected rate of return of 16%. MBI, a large computer company, will pay a year-end dividend of $4 per share. If the stock is selling at $50 per share, what must be the market's expectation of the growth rate of MBI dividends? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Growth rate % b-1. If dividend growth forecasts for MBI are revised downward to 6% per year, what will be the price of the MBI stock? (Round your answer to 2 decimal places.) Price $ b-2. What (qualitatively) will happen to the company's price–earnings ratio? Decreases Increases

Explanation / Answer

Expected Rate of Return=16% Dividend =$ 4 selling price (V)= $ 50

MBI growth =

formula = V =D/Ke-g

V= $ 50 ,D= $ 4 ,Ke= 16% or 0.16

50=4/0.16-g

0.16-g=4/50 => 0.16-g=0.08 => g =0.08 or 8%

dividend growth rate revised to 6% then MBI price=

V= 4/0.16- 0.06 => 4/0.10 = $ 40

so the price of the stock =$ 40

PE ratio= stock price /EPS = 40/4 = 10

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