Using the constant growth model,an increase in the required rate of return from 14 to 15 percent combined with an increase in the growth rate from 6 to 7 percent would cause the price to
A) Rise more than 1%
B) Rise less than 1%.
C) Remain constant.
D) Fall more than 1%.
E) Fall less than 1%.

Question

Quizplus · Accepted Answer

$\% \Delta=P_{2} / P_{1} \quad=\left[\left(D_{n}\right)\left(1+g_{2}\right) /\left(k_{2}-g_{2}\right)\right] \div\left[\left(D_{n}\right)\left(1+g_{1}\right) /\left(k_{1}-g_{1}\right)\right]-1$$$\begin{array}{l}
= \left[ \left( D _ { 0 } \right) ( 1 + 0 . 07 ) / ( 0 .15 -0 . 07 ) \right] \div \left[ \left( D _ { 0 } \right) ( 1 +0 . 0 6 ) / ( 0.14 -0 .0 6 ) \right] - 1\
= ( 13.375 \div 13.25 ) - 1 = \square .94 \% < 18
\end{array}$$

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