QUESTION 53 [Bonus Question] Assume the investors\' required return for a stock
ID: 2713526 • Letter: Q
Question
QUESTION 53
[Bonus Question] Assume the investors' required return for a stock decreases from 13% to 10%. What happens to the price of the stock? Why would the price change?
a. The price would rise; investors see less risk in the stock, hence a higher price.
b. The price would fall; investors see more risk in the firm and demand a higher return hence a lower price.
c. The price would not change; changes in the required return do not affect stock prices.
a. The price would rise; investors see less risk in the stock, hence a higher price.
b. The price would fall; investors see more risk in the firm and demand a higher return hence a lower price.
c. The price would not change; changes in the required return do not affect stock prices.
Explanation / Answer
a. The price would rise; investors see less risk in the stock, hence a higher price. Since Price = D1/(ke-g)