Question

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

Answer 1

The correct answer is "16.67%".

Step-by-step explanation:

Given:

Dividend,

= $100 billion

Rate of return,

= 10%

= 0.10

Growth rate,

= 5%

= 0.05

Now,

Market value will be:

=
`(Dividend)/(Rate \ of\ return-Growth \ rate)`

=
`(100)/(0.10-0.05)`

=
`(100)/(0.05)`

=
`2000 \ Billion` ($)

After collapse,

The market value will be:

=
`(100)/((.10-.04))`

=
`(100)/(.06)`

=
`1666.67` ($)

Change in market value will be:

=
`2000-1666.67`

=
`333.33 \ Billion` ($)

hence,

The percentage change in market value will be:

=
`(333.33)/(2000)`

=
`16.67`%