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% per year but now are expected to grow by 1% per year?

Question

Quizplus · Accepted Answer

Under the efficient markets hypothesis, stock prices reflect all available information. The price of a stock can be modeled using the Gordon Growth Model (Dividend Discount Model for a perpetuity) as P = D / (r - g), where P is the price, D is the dividend, r is the required rate of return, and g is the growth rate. If the expected growth rate decreases, the denominator (r - g) increases, leading to a decrease in the stock price. Without specific numbers for r, we can't calculate the exact percentage change, but the principle that a decrease in expected growth rate leads to a decrease in stock price supports the concept that the stock price would decrease, and among the provided options, -23.7% is a plausible estimate for such a scenario based on typical market reactions and model outcomes.

Under the Efficient Markets Hypothesis, What Will Be the Percentage