Question

1. Suppose that in 2020 the expected dividends of the stocks in a broad market index equaled $200 million when the discount rate is 7% and the expected growth rate of the dividends is 3%. Using the constant-growth formula for valuation, if interest rates decrease to 5%, the value of the market will change by

   	A.	50%
   	B.	-100%
   	C.	50%
   	D.	100%

Answer 1

Current Market value
Market value = D1 / r - g
Where,
D1 = Expected Dividend
r= required rate of return
g= growth rate
=200/0.07-0.03
=5000
Market value if discount rate is 5%
market value= D1 / r - g
Where,
D1 = Expected Dividend
r= required rate of return
g= growth rate
=200/0.05-0.03
=10000
Market value changed = ($1000-5000)/5000
=100%
Correct Option : D.100%