This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: (c) Suppose MetaTrend decideds to pay out all its earnings as cash dividends. There-fore it does not grow. What is the change, if any, in MetaTrends stock price? Why? Answer: (a) We can use the growth formula growth = ROE (1-payout ratio) = 0 . 12 (1-. 5) = 0 . 06 (b) We can apply the formula of DDM with constant growth P MetaTrend = book value ROE payout ratio cost of capital - growth = 10 . 12 . 5 . 12-. 06 = 10 (c) We can apply the formula of DDM with no growth P MetaTrend = book value ROE payout ratio cost of capital = 10 . 12 . 12 = 10 The price is same as that of part a. The reason is that the dividends gave up exactly oset the present value of the increase of future cash ows, ie ROE = cost of capital. 2...
View Full Document
This note was uploaded on 01/19/2011 for the course 15 15.407 taught by Professor Wang during the Fall '03 term at MIT.
- Fall '03