Suppose that the total value of dividends to be paid by companies in the Narnian stock market index is $100 billion. Investors expect dividends to grow over the long term by 5% annually, and they require a 10% return. Now a collapse in the economy leads investors to revise their growth estimate down to 4%. By how much should market values change

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Cricetus Cricetus · Answer 1 · 2021-06-27T08:30:35+02:00

Answer:

The correct answer is "16.67%".

Explanation:

Given:

Dividend,

= $100 billion

Rate of return,

= 10%

= 0.10

Growth rate,

= 5%

= 0.05

Now,

Market value will be:

= [tex]\frac{Dividend}{Rate \ of\ return-Growth \ rate}[/tex]

= [tex]\frac{100}{0.10-0.05}[/tex]

= [tex]\frac{100}{0.05}[/tex]

= [tex]2000 \ Billion[/tex] ($)

After collapse,

The market value will be:

= [tex]\frac{100}{(.10-.04)}[/tex]

= [tex]\frac{100}{.06}[/tex]

= [tex]1666.67[/tex] ($)

Change in market value will be:

= [tex]2000-1666.67[/tex]

= [tex]333.33 \ Billion[/tex] ($)

hence,

The percentage change in market value will be:

= [tex]\frac{333.33}{2000}[/tex]

= [tex]16.67[/tex]%