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# Firm ABC: Computer earning multiplier in four scenarios

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The dividend payout ratio for firm ABC is 60%, k is 13% and the expected growth of dividends is 7%.

a) What is the current earnings multiplier?
b) You expect the payout ratio to decline to 50%, all else equal. What is the new earnings multiplier?
c) With the payout ratio at 60%, the rate of inflation increases 3% while the growth rate increases 2%. What is the new earnings multiplier?
d) With the payout ratio at 60%, the rate of inflation is expected to drop by 3% while the growth rate decreases by 1%. What is the new earnings multiplier?

#### Solution Preview

a) We know that P0=D0*(1+g)/(k-g)
Divide both sides by E0, we get P0/E0 = (D0/E0)*(1+g)/(k-g) = DPS0*(1+g)/(k-g)
P0/E0 = ...

#### Solution Summary

The solution computes earning multiplier in four scenarios for Firm ABC. The payout ratio is determined.

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