Question

If the required rate of return used in the dividend growth model is increased, then: select one:

a. the growth rate must also increase.
b. the supernormal model must be used to value the stock.
c. the current value of the stock will decrease.
d. the dividend amount must also increase.
e. p0 will increase.

Answer 1

Option C is correct.

The required rate of return and Value of a stock shares inverse relationship. That is, if the required return increases the value or the price of the stock will decrease and vice versa. Therefore, as a result of increase in the required return, the value of the stock will decrease.