All else equal, which of the following is/are true?
I. The stock price increases as the dividend growth rate increases.
II. The stock price increases as the expected rate of return increases.
III. The stock price increases as the current dividend increases.
IV. The payout ratio increases as current earnings increase.
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A. B. C. D. E. F. G. H.G
The Dividend Discount Model implies, in standard notation, that Po = D1/(k-g). This equation serves to justify the choices. It should be noted that in this question, the phrase, "all else equal" is critical. In III, for e.g., you cannot expect the stock price to rise solely because dividend increases (indeed, the priceshould fall because part of the firm is being paid out as cash). The "all else equal" stipulates that the growth rate of dividend and expected return remain constant, which is what causes the stock price to rise.