Question:

Computer stock currently provides an expected rate of return of 16%. MBI, a large computer company, the next expected dividend is $2 per share.

Problem:

(a) If the stock is selling at $50 per share, based on constant growth model, what must be the markets expectation of the growth rate of MBI dividends?

(b) If dividend growth forecasts for MBI are revised downward to 5% per year, what will happen to the price of MBI stock?