Using the constant growth model,an increase in the required rate of return from 14 to 18 percent combined with an increase in the growth rate from 8 to 12 percent would cause the price to
A) Fall more than 4%
B) Fall less than 4%.
C) Rise more than 4%
D) Rise less than 4%.
E) Remain constant.

Question

Quizplus · Accepted Answer

$$\begin{array}{l}
= \left[ \left( D _ { 0 } \right) ( 1 + 0 .12 ) / ( 0.18 - 0 .12 ) \right] \div \left[ \left( D _ { 0 } \right) ( 1 + 0 .08 ) / ( 0.14 -0 .08 ) \right] - 1\
= ( 18.66 \div 1800 ) - 1 = 3.718 < 48
\end{array}$$

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