In computing the cost of common equity, if the dividend (D₁) goes downward and market price (P₀) goes up, required rate of return (K_e) will A) go up. B) go down. C) stay the same. D) slowly increase.

Question

Quizplus · Accepted Answer

The required rate of return (K_e) is calculated using the formula K_e = (D₁/P₀) + g, where D₁ is the expected dividend, P₀ is the current market price, and g is the growth rate. If D₁ decreases and P₀ increases, the dividend yield (D₁/P₀) decreases, leading to a lower required rate of return.

In Computing the Cost of Common Equity, If the Dividend