Respuesta :
Answer:
a)
$50 = $2 / (16% - g)
16% - g = $2 / $50 = 4%
g = 16% - 4% = 12%
expected growth rate = 12%
b)
P₀ = $2 / (16% - 5%)
P₀ = $2 / 11%
P₀ = $18.18
c)
P/E ratio = share price / EPS
since the share price decreases from $50 to $18.18, the P/E ratio will decrease. When you are dividing a number, if the numerator decreases while the denominator remains still, the answer will decrease.
Growth rate in case 1 and Current Stock Price in case 2 are 12% and $18.18
Computation:
Case 1 ; Using Gordon's Model,
P = D1/(r - g)
50 = 2/(16% - g)
50 = 2/(0.16 - g)
0.16 - g = 2/50
0.16 - g = 0.04
g = 0.16 - 0.04
g = 0.12
Growth rate = 12%
Case 2 ; Using Gordon's Model,
P = D1/(r - g)
P = 2/(16% - 5%)
P = 2/(0.16 - 0.05)
Current Stock Price P = $18.18
Case 3;
Because the value of the shares has dropped, the P/E ratio has dropped as well. As a result, the P/E ratio will fall.
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