Computer stocks currently provide an expected rate of return of 14%. MBI, a larg

Question

Computer stocks currently provide an expected rate of return of 14%. MBI, a large computer company, will pay a year-end dividend of $4 per share. If the stock is selling at $80 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 4% 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 14%. MBI, a large computer company, will pay a year-end dividend of $4 per share. If the stock is selling at $80 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

a Given : Expected dividend =D1=                            4 Cost of Equity =K= 14% Share Price =P0=                          80 Assume dividend growth rate =g By dividend growth model   P0= d1/(k-g) 80= 4/(0.14-g) 11.20-80g=4 g=9% So expected dividend growth rate = 9% b1 when g is revised to 4% Price will be = 4/(0.14-0.04)=4/0.10= $                40.00 So price of MBI stock will be $40 b2 If Price is reduced EPS will also decrease.

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