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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 MetaTrend’s 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 oﬀset the present value of the increase of future cash ﬂows, ie ROE = cost of capital. 2...
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- Fall '03
- Dividends, Dividend yield, P/E ratio, payout ratio, MIT Sloan School of Management, MetaTrend