Computer stocks currently provide an expected rate of return of 12%. MBI, a larg

Question

Computer stocks currently provide an expected rate of return of 12%. MBI, a large computer company, will pay a year-end dividend of $3 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.)

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.)

What (qualitatively) will happen to the company's price–earnings ratio?

Computer stocks currently provide an expected rate of return of 12%. MBI, a large computer company, will pay a year-end dividend of $3 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.)

Explanation / Answer

Growth Rate = Expected Return x Dividend Yield
=> 12% x ($3/$50) = 0.0072 or 0.72%

b-1. Price of the stock = Dividend / Ke – g
                => $3 / (12% - 6%) = $50

b-2 I guess, the information of part a section is required to answer this question. However, you can calculate this by just interchanging the values:

P/E Ratio at current price = $50/$3 = 16.67

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