Ans - Part (A) Increase in dividend may not always increase the price . Take the example of mature company. The net profit declines as company is entering into mature phase. Lower net profits, lower dividend rate.
Part(B) Price = D1 / (r- g)
where D1= D0 * ( 1 + g)
12 = 2.05 / r - 6.5%
12 = 2.05 / r - 6.5%
r - 6.5% = 2.05 / 12
r - 6.5% = 0.17083
or
r - 6.5% = 17.08%
r = 17.08% + 6.5%
r = 23.58%
PART (C) the required rate of return is always greater than growth, The reason behind that if r<g , then share price become negative
example- expected dividend = 2
rate =3%
g =4%
price = D1 / (r- g)
= 2 / (3% - 4%)
= 2 / (-1%)
= -200 which is not possible .
That is why r should be grater than g always
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