Question

You originally required a risk premium of 6 percent in addition to the rate of return on safe assets before you would purchase shares of Techno Company stock. If you and other investors reduce the risk premium you require to 4 percent, the price of Techno Company stock will:

Answer 1

Answer:

The price of Techno Company stock will Increase

Explanation:

Answer 2

Answer:

increase

Explanation:

One of the most common ways to determine the price of stocks is by using the Gordon growth model:

• stock price = dividends / (required rate of return - growth rate)

the require rate of return = risk free rate + risk premium

if the risk premium decreases, then the required rate of return will also decrease. If the RRR decreases, then the denominator in the equation will decrease, and when that happens the value of stocks increases.