Computer stocks currently provide an expected rate of return of 18%. MBI, a larg

Question

Computer stocks currently provide an expected rate of return of 18%. MBI, a large computer company, will pay a year-end dividend of $1 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 2% per year, what will be the price of the MBI stock? (Round your answer to 2 decimal places.)

Computer stocks currently provide an expected rate of return of 18%. MBI, a large computer company, will pay a year-end dividend of $1 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

a.

Current expected rate of return=18%,

Dividend of next year(D1)=$1 per share,

Current Price(P0)=$ 50

As per growth model Current Price of Stock (P0)=D1/Ke-g

50=1/.18-g

50(.18-g)=1

9-50g=1

-50g=1-9

-50g=-8

g=.16

Thus growth Rate=16%

b.

Revised Growth Forcast=16-2=14%

Then ,

Current Market Price (P0) =D1/Ke-g

=1/.18-.14

=1/.04

=25

Revise current Market price=$ 25

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.