a. Computer stocks currently provide an expected rate of return of 16%. MBI, a large computer company,

Question:

a. Computer stocks currently provide an expected rate of return of 16%. MBI, a large computer company, will pay a year-end dividend of $2 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?

b. If dividend growth forecasts for MBI are revised downward to 5% per year, what will happen to the price of MBI stock? What (qualitatively) will happen to the company’s price– earnings ratio?

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...