Using the Constant Growth Model, an Increase in the Required

question 39

Multiple Choice

Using the constant growth model, an increase in the required rate of return from 14 to 18% combined with an increase in the growth rate from 8 to 12% would cause the price to

• A) Fall more than 4%
• B) Fall less than 4%.
• C) Rise more than 4%
• D) Rise less than 4%.
• E) Remain constant.

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Definitions:

Debits

In accounting, an entry made on the left side of an account, increasing asset or expense accounts, or decreasing liability, equity, or revenue accounts.

Credits

Entries that increase liabilities or equity on the balance sheet or reduce assets.

Ledger

A book or digital record holding all the accounts of a company, showing the changes made to each account and the current balance.

Journal

A chronological record of all business transactions, used to transfer information to the general ledger.