Which of the following will cause the stock price to increase if you assume that the constant growth pricing model [P(0) = D(1) / (r(s) – g)] is correct: a. Decrease in Dividends
b. Increase in the required rate of return
c. Increase in the growth rate
d. Increase in the Required Rate of Return and Decrease in dividends

c. Increase in the growth rate

Explanation:

we can use an example to illustrate how this works:

Div₁ = $2

r = 10%

g = 2%

P₀ = $2 / (10% - 2%) = $25

if g increases from 2% to 4%, even if nothing else changes,

P₀ = $2 / (10% - 4%) = $33.33

An increase in g decreases the denominator and that will always result in a larger number.

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