If the real interest rate is,more or less,constant and the growth rate of dividends falls sharply,
A)the price-earning ratio would fall.
B)the marginal product of capital would fall.
C)firm profits would rise.
D)stock prices would fall.
E)both a and d

Question

Quizplus · Accepted Answer

If the growth rate of dividends falls sharply, it indicates that the expected future cash flows of the firm are lower, leading to a lower stock price. A constant real interest rate indicates that the cost of capital remains the same, hence a fall in future cash flows will lead to a fall in stock prices because of lower expected returns. This will also result in a fall in the price-earning ratio since the earnings are lower than what is needed to sustain the stock price. Therefore, both options A and D are correct.

If the Real Interest Rate Is,more or Less,constant and the Growth