KSI, a large energy company, will pay a $2.00 per share dividend at year-end. It

is currently trading at $50 per share. Suppose energy stocks have a 16% expected rate of

return.

a. What is the market's expectation of the growth rate of KSI's dividends?

b. Suppose dividend growth forecasts for KSI are revised down to 5% per year. What will

happen to the price of KSI's stock? Will KSI's P/E ratio rise or fall?