MotorTrend Magazine earns a book rate of return (ROE) of 12%. It reinvests one-half its earnings and pays out the other half as cash dividends. The nominal cost of capital is 12%.

A. Given this ROE and dividend payout ratio, what is the growth rate of Motor Trend Magazines earnings and dividends?

B. Assume this growth rate is expected to continue in perpetuity. What is the present value of Motor Trend Magazine shares? Assume that book value per share is $10.

C. What does your answer to (B) assume about the timing of dividend payments? Explain briey.

D. Suppose Motor Trend Magazine decides to pay out all its earnings as cash dividends. Therefore it does not grow. What is the change, if any, in Motor Trend Magazines stock price? Why?