QUESTION 53 [Bonus Question] Assume the investors\' required return for a stock

Question

QUESTION 53

[Bonus Question]   Assume the investors' required return for a stock decreases from 13% to 10%. What happens to the price of the stock? Why would the price change?

a. The price would rise; investors see less risk in the stock, hence a higher price.

b. The price would fall; investors see more risk in the firm and demand a higher return hence a lower price.

c. The price would not change; changes in the required return do not affect stock prices.

a. The price would rise; investors see less risk in the stock, hence a higher price.

b. The price would fall; investors see more risk in the firm and demand a higher return hence a lower price.

c. The price would not change; changes in the required return do not affect stock prices.

Explanation / Answer

a. The price would rise; investors see less risk in the stock, hence a higher price. Since Price = D1/(ke-g)

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