Question

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

Answer 1

Answer:

d. possibly increase, possibly decrease, or possibly remain constant

Explanation:

The expected growth rate of a firm is only one input for the calculation of required return. The other factors include the price of the stock and the expected dividend.

If all others 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 decreasing the return rate.

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