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A decrease in a firm’s expected growth rate would normally cause its required rate of return...

A decrease in a firm’s expected growth rate would normally cause its required rate of return to

increase.

decrease.

remain constant.

possibly increase, possibly decrease, or possibly have no effect.
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Answer #1

Answer: Possibly increase, possibly decrease, or possibly have no effect.

Required rate of return refers to the minimum return a investor would accept to own the stock of a firm. It basically depends on the risk level associated with the company's stock.
According to capital asset pricing model,  the required return is calculated as:
Required return=Risk free rate +Beta*(Expected market return - Risk free rate)
We see that there is no relation between a firm’s expected growth rate and its required rate of return.
So, required return may increase, decrease or remain unchange with a decrease in a firm’s expected growth rate.

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