Using the constant growth model,an increase in the required rate of return from 19 to 17 percent combined with an increase in the growth rate from 11 to 9 percent would cause the price to
A) Fall more than 2%
B) Fall less than 2%.
C) Remain constant.
D) Rise more than 2%.
E) Rise less than 3%.

Question

Quizplus · Accepted Answer

$\% \Delta=P_{2} / P_{1} \quad=\left[\left(D_{0}\right)\left(1+g_{2}\right) /\left(k_{2}-g_{2}\right)\right] \div\left[\left(D_{0}\right)\left(1+g_{1}\right) /\left(k_{1}-g_{1}\right)\right]-1$ $$\begin{array}{l}
= \left[ \left( D _ { 0 } \right) ( 1 + 0 . 0 9 ) / ( 0.17 -0.09 ) \right] \div \left[ \left( D _ { 0 } \right) ( 1 +0.11 ) / ( 0.19 -0 .11 ) \right] - 1\
= ( 13.625 \div 13.875 ) - 1 = - 1.88 > - 28 /
\end{array}$$

Using the Constant Growth Model,an Increase in the Required Rate