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?
A) −16.67%.
B) zero.
C) −20%.
D) +20%.

Question

Quizplus · Accepted Answer

Before the collapse: PV = 100/(0.10 − 0.05) = $2,000 bnAfter the collapse: PV = 100/(0.10 − 0.04) =$1,667 bnChange = 1,667/2,000 − 1 = −16.67%

Suppose That the Total Value of Dividends to Be Paid