Question

Suppose that in 2020 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, if the discount rate increases to 9%, the value of the broad market index will change by ________.

Answer 1

-33.33%

Step-by-step explanation:

This is the The formula for this solution:

Value of Market = Expected Dividend divided by (Discount Rate-Growth rate of Dividend)

The Expected Dividend is 240

Then Value of Market = 240/(8% - 6%)

= 12,000,000,000

Then we get Value of market when discount rate = 9%

The Value of Market = 240/(9% - 6%)

= 8,000,000,000

the market value has changed.

We then get the percentage change will be = (

= (12,000,000,000 - 8,000,000,000) / 12,000,000,000

= 33.33%

The market value has fallen by -33.33%