nitoha

CPK,

if the dividend pay out increases, then b should decrease. I'm not sure why u said b increases....

I think the reasoning is as follows (assuming all else is constant):

If payout increases, the company retains less for re-investment, so retention ratio (b) decreases

since b decreases, growth (g) decreases as (remember the formula g=b*ROE)

As a result (r-g) increase....but also keep in mind that Div payout also increased as stated by the question.

Since the numerator (div payout) and the denominator (r-g) increases, the price will increase as well. Pure arithmetic here.

So the answer is A.