Question

List changes in the market or within a firm that would cause the required rate of return on the firm's stock to change.

Answer 1

The required rate of return increases when the perceived risk of future cash flows increases and vice versa.

The below factors would cause the required rate of return on the firm's stock to change.

Changes in the market

1. A rise in the inflation rate would cause the interest rates to go up

2. Central bank introducing expansionary monetary policy would cause the required rate of return to decrease

Changes in the firm

1. The resignation of key top executives would cause the required rate of return to increase

2. The firm deciding to reduce its debt would cause the required rate of return to decrease

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