Today is January 1st, 2016. Fabregas, Inc. is projecting earnings per share (EPS) of $4.50 for January 1st, 2017. It plans to pay out 35% of its earnings in dividends, and management is confident that its ROE of 9.0% on new investments can be maintained over a reasonably long horizon.

The expected market return is 6.5%, Fabregas, Inc. has a Beta of 1.2, and the risk-free rate is 0.5%. For Fabregas, Inc. calculate the market capitalization rate, the growth rate of earnings, and todays price and P-E ratio (calculated as the ratio of todays price to expected earnings on January 1st, 2017).

(Enter all answers with two decimal places).

Market capitalization rate: 7.70%

Growth rate of earnings: 5.85%

Price: 85.14

P-E: 18.92

Q. If Fabregas management decides to postpone dividend payouts until January 1st, 2020, and will distribute them thereafter at 25% of earnings, the P-E ratio calculated in the previous question will

(No calculations needed)

a. Increase

b. Decrease

c. Remain constant

d. Cannot be determined without further information