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 rise.
E) the MPK would rise.

Question

Quizplus · Accepted Answer

A fall in the growth rate of dividends would lower expected future earnings for the firm, leading to a decline in stock prices. The price-earnings ratio would also decrease because earnings would be relatively smaller compared to the stock price.

If the Real Interest Rate Is, More or Less, Constant