Final answer:
When the required rate of return increases in the dividend growth model, Po, which represents the current stock price, will decrease. This is a result of increased discount rates applied to future expected dividends, reducing their present value. the correct answer is c. Po will decrease.
Step-by-step explanation:
If the required rate of return used in the dividend growth model is increased, then the correct answer is c. Po will decrease.
This is because the price of a stock is calculated by discounting the expected dividends by the required rate of return. When the required rate of return increases, the present value of future dividends decreases, which lowers the stock's current value, as indicated by Po.
This is not directly related to the dividend amount, does not necessarily require the use of the supernormal model, and does not imply that the current value of the stock will increase.
In the context of stock valuation, the rate of return expected by investors can come both from dividends and from capital gains, which is the increase in the stock value between the time it is bought and when it is sold.
However, changes in the required rate of return are generally about investor expectations and market interest rates, rather than about changes to the dividends themselves or to the use of different valuation models. the correct answer is c. Po will decrease.