Using the constant growth model,an increase in the required rate of return from 17 to 20 percent combined with an increase in the growth rate from 8 to 11 percent would cause the price to
A) Rise more than 3%
B) Rise less than 3%.
C) Remain constant.
D) Fall more than 3%.
E) Fall less than 3%.

Question

Quizplus · Accepted Answer

$$\begin{aligned}
\% \Delta = P _ { 7 } / P _ { 1 } & = \left[ \left( D _ { 0 } \right) \left( 1 + D _ { 1 } \right) / \left( k _ { 2 } - D _ { 2 } \right) \right] \div \left[ \left( D _ { 0 } \right) \left( 1 + D _ { 1 } \right) / \left( k _ { 1 } - D _ { 1 } \right) \right] - 1 \
& = \left[ \left( D _ { 0 } \right) ( 1 + 0.11 ) / ( 0.20 - 0.11 ) \right] \div \left[ \left( D _ { 0 } \right) ( 1 + 0.08 ) / ( 0.17 - 0.08 ) \right] - 1 \
& = ( 12.33 \div 12.00 ) - 1 = 2.75 \% < 3 \%
\end{aligned}$$

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