kmf229

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 reinvestment, so retention ratio (b) decreases
since b decreases, growth (g) decreases as (remember the formula g=b*ROE)
As a result (rg) increase….but also keep in mind that Div payout also increased as stated by the question.
Since the numerator (div payout) and the denominator (rg) increases, the price will increase as well. Pure arithmetic here.
So the answer is A.