Question

According to the constant growth in dividends price formula given in the textbook, if the dividend to be paid one year from today increases and all other factors remain constant, the price of the stock will __________; of the growth rate of all future dividends increases and all other factors remain constant, the price of the stock will __________; and if the required rate of return increases and all other factors remain constant, the price of the stock will __________.

Answer 1

Answer:

If the dividend  increases,  the price of the stock will go up.

If the growth rate increases, the price of the stock will go up.

If required rate of return increases, the price of the stock will go down.

Explanation:

Price of stock from the constant growth formula is calculated as follows:

$P0=\frac{D1}{ke-g}$

where P0 is the price of the stock today

           D1 is the dividend expected to be paid 1 year from today

           ke is the required rate of return

             g is the expected growth rate in dividends

if D1 increases, holding all other factors constant, P0 will increase.

if g increases, holding all other factors constant, P0 will increase.

if ke increases, holding all other factors constant,P0 will decrease.