Question

Everything equal, which variable is negatively related to intrinsic value of a company?

D₁

D₀

g

k

Answer 1

The formula for intrinsic value of the stock is = D₁/(r-g) or D₀(1+g)/(r-g)

From the formula, we can directly say that D1 and D0 are positively related to intrinsic value, as increase in D1 and D0 increases the intrinsic value as well

growth rate(g) is also positively related to intrinsic value, as increase in growth rate reduces the weight of the denominator and so increases the final intrinsic value

return rate(k) is negatively related to intinsic value, as increase in return rate increases the weight of the denominator and so decreases the final intrinsic value. So, as increase in k decreases the intrinsic value, they both are negatively related

So, ans is k