Question

Fill in the blanks: Stock prices fall if investors either expect _________ growth rates or require _________ returns.A. higher, higherB. higher, lowerC. lower, higherD. lower, lower

Answer 1

C. higher . . . lower

Step-by-step explanation:

If less people are dying there will be more people on earth and if more people are being born then there will also be more people on earth. Therefore, populations grow quickly when there is a higher birth rate and a lower death rate.

Answer 2

C. lower, higher

The reason for this is that when growth rates are lower investors will be willing to pay less for the stock is because low growth rate mean that the capital gains will be less as stock price is less likely to increase in the future and dividend growth is also less. Also the DDM model D*(1+G)/1-R shows that mathematically a lower growth rate would mean lower stock price

Also Higher required returns mean that the investor requires higher returns to buy the stock, because he may view the stock as risky and requires higher returns for the risk he is taking or he may have a higher opportunity cost (for eg interest rates may be high) with other investments. Mathematically the DDM model D*(1+G)/R-G shows us that a higher R would mean lower stock price.

Step-by-step explanation: