Question

An increase in a firm’s expected growth rate would cause its required rate of return to

Answer 1

Possibly Increase, Possibly Decrease, or Possibly remain constant.

Step-by-step explanation:

The dividend valuation formula can be used to explain the implications of the growth rate, which is given as under:

r = D* (1+g) / Po + g

This means the increase in growth rate increases the rate of return of the shares because it increases the nominator by (1+g) and with the growth percentage.

However, we should remember that the Dow or S & P doesnot values the stock by using the Dividend Valuation Model. So we can say it increases the rate of return but other models like cash valuation model, Capital Asset Pricing Model, M & M Model, etc can also be used which might decrease or keep the required rate of return constant.