Question

If the interest rate is rising and stock prices are simultaneously rising, then according to the fundamental theory of stock pricing

A	Expected dividends of firms must be rising

B	The future price of the stock must be falling

C	There must be irrational agents in the market

D	The expected dividends of firms must be falling

Answer 1

D.) Expected dividends of firms must be rising

Common stock = D1/k-g where k= rate of return and g = growth rate

Stock Price = (Dividends Paid (Divk ) + Expected Price (P1)) / (1 + Expected Return (R))

Value of Stock = Dividends per share/(Stockholders rate of return - dividend growth rate)

Stock Price = Dividends (Div) / (Expected Return (R) - Dividend Growth Rate (G))

Higherinterest rates will affect the cost of its debt. This can reduce company profits and the dividends it pays share holders. As a result, its share price may drop. And, in times of higher interest rates, investments that pay interest tend to be more attractive to investors than stocks.