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

Question

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 % 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 $ What (qualitatively) will happen to the company's price-earnings ratio? Increases Decreases

Explanation / Answer

G= R -D1/P

r= required return =16%

D1=4

P=50

=16% -4/50

=8%

Hence growth rate =8%

b-1 if growth rate is revises

= D1/(r-g)

=4/(16% -6%) =40

b-2 P/e as the price is decresimg , p/e e should decrease ,assuming all things constant

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