Under the efficient markets hypothesis, what will be the percentage change in the stock price of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% but now are expected to grow by 4% per year?

Question

Quizplus · Accepted Answer

According to the efficient markets hypothesis, any changes in expected growth rates will be immediately reflected in the current stock price. Using the constant growth model, the new expected dividend per share can be calculated as follows:
D1 = D0 x (1 + g) = $10.00 x (1 + 0.04) = $10.40
Assuming a required rate of return of 10%, the new stock price can be calculated as follows:
P0 = D1 / (r - g) = $10.40 / (0.10 - 0.04) = $173.33
The percentage change in stock price can then be calculated as follows:
[(New price - Old price) / Old price] x 100% = [(173.33 - 146.41) / 146.41] x 100% = 18.3%
Therefore, the best choice is B, which is the closest to the calculated percentage change in stock price of 18.3%.

Under the Efficient Markets Hypothesis, What Will Be the Percentage