Which of the following will cause the stock price to decrease if you assume that the...
Which of the following will cause the stock price to decrease if you assume that the constant growth pricing model [P(0) = D(1) / (r(s) – g)] is correct:
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Increase in Dividends |
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Increase in the required rate of return |
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Increase in the growth rate |
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Decrease in the Required Rate of Return and increase in dividends |
Homework Answers
Solution
Answer-Increase in the required rate of return
According to Dividend growth model
Price of stock=D1/(R-G)
Where
D1= Dividend year1
R= Rate of return
G=Growth rate
Therefore if R (Rate of return) increases price of stock will decrease as can be seen from the formula
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