Question

The value of a share of stock:

1. Decreases as the dividend growth rate decreases.
2. Decreases as the required rate of return increases.
3. Decreases as the required rate of return decreases.

d.         Both A and B.

Answer 1

Option d is correct

Both A and B are correct

The formula is, Value of share=Dividend1/(required rate of return-growth rate)

The value of share increases if the denominator decreases and decreases if the denominator increases.

==>If the growth rate decreases, the denominator increases thus reducing the value of the share

==>If the required rate of return increases, the denominator also increases thus decreasing the value of the share

==>If the required rate of return decreases, the denominator decreases thus increasing the value of the share.

Hence, both A and B are correct