Question

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:

		Increase in Dividends
		Increase in the required rate of return
		Increase in the growth rate
		Decrease in the Required Rate of Return and increase in dividends

Answer 1

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