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MBI Dividend Growth: Unveiling Market Expectations with Gordon Model
Chapter 13, Problem 17(choose chapter or problem)
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?
Questions & Answers
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?
ANSWER:Step 1 of 3
a.
We can use the Gordon Growth Model to determine the market's expectation of the growth rate of MBI dividends. According to the model, the price of a stock is equal to the dividend expected to be received at the end of the year, divided by the difference between the expected rate of return and the growth rate of dividends.
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MBI Dividend Growth: Unveiling Market Expectations with Gordon Model
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Unlock the power of the Gordon Growth Model in this video, a valuable tool for evaluating dividend-paying stocks and forecasting dividend growth rates. Discover how changes in expected dividend growth can influence stock prices and P/E ratios, providing valuable insights for investors and financial analysts.