If a firm's expected growth rate increased then its required rate of return would a

Accounting Jun 22, 2021

If a firm's expected growth rate increased then its required rate of return would a. decrease. b. fluctuate less than before. c. fluctuate more than before. d. possibly increase, possibly decrease, or possibly remain constant. e. increase.

Expert Solution

Answer

d .

Explanation

The correct option is D "possibly increase, possibly decrease, or possibly remain constant".

As we know that,

Required Rate of Return = Next Year Dividend/Current Stock Price + Growth Rate

If all others factors are held equal, an increase in the growth rate will cause the required return to increase, but if the dividend increases with the expected growth rate, this have the effect of lowering the required return.

So, the increase in the firm's expected growth rate would cause its required return to possibly increase, possibly decrease or possibly remain constant.

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