Chapter 10, Problem 33P

A firm pays a $\text{\$1}\text{.50}$ dividend at the end of year one $(D_1),$ has a stock price of $\text{\$155 }(P_0),$ and a constant growth rate (g) of 10 percent.

a. Compute the required rate of return $(K_e)$ . Indicate whether each of the following changes would make the required rate of return $(K_e)$ go up or down. (Each question is separate from the others. That is, assume only one variable changes at a time.) No actual numbers are necessary.

b. The dividend payment increases.

c. The expected growth rate increases.

d. The stock price increases.