Question

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. |

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.

1. If a firm’s expected growth rate increases (and all else
remains constant), what would you expect to happen to the current
value of the firm’s stock?
A. The value would
increase.
B. The value would
decrease.
C. The value would
stay the same.
D. You cannot determine
what will happen to the value of the firm’s stock.
2. If a firm’s expected dividend increases (and all else remains
constant), what would you expect to happen...

An increase in nondiversifiable risk
A.
would cause a decrease in the beta and would, therefore, lower
the required rate of return.
B.
would cause an increase in the beta and would lower the required
return.
C.
would cause an increase in the beta and would increase the
required return.
D.
would have no effect on the beta and would, therefore, cause no
change in the required return.

The risk-free rate of return is 2 percent, and the expected
return on the market is 7.8 percent. Stock A has a beta coefficient
of 1.7, an earnings and dividend growth rate of 7 percent, and a
current dividend of $3.00 a share. Do not round intermediate
calculations. Round your answers to the nearest cent.
If the beta coefficient falls to 1.4 and the other variables
remain constant, what will be the value of the stock?
$___________
Explain why the...

The risk-free rate of return is 4 percent, and the expected
return on the market is 7.1 percent. Stock A has a beta coefficient
of 1.4, an earnings and dividend growth rate of 6 percent, and a
current dividend of $1.50 a share. Do not round intermediate
calculations. Round your answers to the nearest cent.
What should be the market price of the stock?
$
If the current market price of the stock is $45.00, what
should you do?
The...

Out of the below options, what would likely cause the required
rate of return on a stock to decline?
1. The risk free rate falls
2. The beta increases
3. The Expected Return on the Market increases
4. Corporate Bond Rates Increase

eBook
Problem 11-06
The risk-free rate of return is 1 percent, and the expected
return on the market is 9 percent. Stock A has a beta coefficient
of 1.5, an earnings and dividend growth rate of 3 percent, and a
current dividend of $2.80 a share. Do not round intermediate
calculations. Round your answers to the nearest cent.
$
The stock -Select-shouldshould notItem 2 be purchased.
$
$
$
The increase in the return on the market
-Select-increasesdecreasesItem 6 the...

VALUATION OF A CONSTANT GROWTH STOCK
Investors require a 16% rate of return on Levine Company's stock
(i.e., rs = 16%).
What is its value if the previous dividend was D0 = $3.50 and
investors expect dividends to grow at a constant annual rate of (1)
-2%, (2) 0%, (3) 7%, or (4) 13%? Do not round intermediate
calculations. Round your answers to two decimal places.
(1) $
(2) $
(3) $
(4) $
Using data from part a, what...

VALUATION OF A CONSTANT GROWTH STOCK
Investors require a 17% rate of return on Levine Company's stock
(i.e., rs = 17%).
What is its value if the previous dividend was D0 =
$2.50 and investors expect dividends to grow at a constant annual
rate of (1) -4%, (2) 0%, (3) 5%, or (4) 11%? Do not round
intermediate calculations. Round your answers to two decimal
places.
(1) $
(2) $
(3) $
(4) $
Using data from part a, what...

What is the difference between the required rate of return and
the expected rate of return?
According to the scenario using the analysis of the current
growth model for the required rate of return and the excepted rate
of return we were asked if we could give the investors a 15% return
CAPM We used beta as an estimate number which gave us a benchmark
TF wanted to know the value of their stock and keep in mind admin
changes...

REQUIRED RATE OF RETURN
Suppose rRF = 6%, rM = 11%, and bi = 1.6.
2. Now suppose rRF decreases to 5%. The slope of the SML remains
constant. How would this affect rM and ri?
What is ri, the required rate of return on Stock i? Round your
answer to two decimal places.
%
1. Now suppose rRF increases to 7%. The slope of the SML remains
constant. How would this affect rM and ri?
rM will remain the...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 26 minutes ago

asked 56 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago

asked 3 hours ago

asked 3 hours ago

asked 4 hours ago