Computer stocks currently provide an expected rate of return of 17%. MBI, a large computer company, will pay a year-end dividend of $2.20 per share.
If the stock is selling at $52 per share, what must be the market's expectation of the growth rate of MBI dividends?
b-1. If dividend growth forecasts for MBI are revised downward to 7% per year, what will happen to the price of MBI stock?
The price will fall.
The price will rise.
b-2. What (qualitatively) will happen to the company's price–earnings ratio?
The price–earnings ratio will fall.
The price–earnings ratio will rise.