Using the constant growth model,a decrease in the required rate of return from 15 to 13 percent combined with an increase in the growth rate from 5 to 6 percent would cause the price to
A) Rise more than 50%.
B) Rise less than 50%.
C) Remain constant.
D) Fall more than 50%.
E) Fall less than 50%.

Question

Quizplus · Accepted Answer

$\% / o \Delta=P_{2} / P_{1}$ 
$=\left[\left(D_{0}\right)\left(1+g_{2}\right) /\left(K_{2}-g_{2}\right)\right] \div\left[\left(D_{0}\right)\left(1+g_{1}\right) /\left(K_{1}-g_{1}\right)\right]-1$  $$\begin{array}{l}
= \left[ \left( D _ { 0 } \right) ( 1 + 0 . 0 6 ) / ( 0 .13 - 0 . 0 6 ) \right] \div \left[ \left( D _ { 0 } \right) ( 1 +  . 05 ) / ( 0.15 - 0 . 0 5 ) \right] - 1\
= ( 15.14 \div 10.5 ) - 1 = 44.22 \% < 50 \%
\end{array}$$

Using the Constant Growth Model,a Decrease in the Required Rate