Computer stocks currently? Provide an expected rate of return of 12%. MBI. a lar
ID: 2774497 • Letter: C
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 $60 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 4% 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-eamings ratio? The stock of Nogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $2. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20% rate of return per year. This situation is expected to continue indefinitely. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM. what rate of return do Nogro's investors require? (Do not round intermediate calculations.) Rate of return % By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested? PVGO $Explanation / Answer
Answer 7 (a)
Gowth rate = 7%
Expected Rate of Return k = 12% or 0.12
Dividend D1 = $ 3
Current Market Price P0 = $ 60
Current Market Price P0 = D1 / k – g where g is the growth rate of dividends
k – g = D1/P0 ==> g = k – D1/P0
Substituting values from above
g = 0.12 - $3/$60 = 0.12 – 0.05 = 0.07
growth rate = 7%
Answer 7 (b1)
Price = $ 37.50
Dividend growth rate g = 4%
Price of MBI Stock = $ 3 / 0.12 – 0.04 = $ 3 /0.08
= $ 37.50
Answer 7(b2)
Price Earnings ratio declines with the growth rate. As the growth rate declines the price declines, that is the numerator in Price Earnings Ratio declines. Considering Earnings remain unchanged, the P/E ratio declines with decline in growth rate of dividends and vice-versa.
Answer 10 (a)
Rate of Return = 21%
Current Market Price P0= $ 10
Expected Earnings = $ 2
Dividend Payout = 50% of earnings
Retained Earnings are invested in a project with a return on 20%
Expected dividend payment = $2 * 0.50 = $1
Growth rate of retained earnings is 20%
growth rate of earnings and dividends = 20% *.05 = 10%
Next Year Dividend D1 = $ 1 * 1.10 = $ 1.10
Required rate of return = D1/P0 + g = $1.10/10 + 0.10 = 0.21
Answer 10(b)
PVGO = $ 0.48
If the entire earnings are paid as dividends then
P0 = D1/k-g where k = 20% g = 0
P0 = $2/0.21 = $ 9.5238 or $ 9.52 (rounded off)
Stock Price = No growth stock price + Present Value of growth opportunities (PVGO)
$ 10 = $ 9.52 + PVGO
PVGO = $ 10 - $ 9.52 = $ 0.48
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