How lower required rate of return would increase stock prices? Please explain in detail

Expert Solution

Lower required rate of return will be always increasing the stock price because when there will be a lower expected required of Return then there will be a lower rate of discounting rate of interest and hence we will always know that when the interest rate which will be applied to the process of discounting the cash flows will be lower, it would be leading to a larger value so when there will be a lower required rate of return which is also used for discounting the cash flows in the process of discounting cash flows then the overall project value will be always higher because discounting is inversely related to the present value.

Hence, it can be said that when the required rate of return will be lower, it would be leading to a higher stock price because there will be higher valuation of this stock due to lower discounting of their cash flows and it can be changed through the expectation in different political regimes because when there will be a lower risk, there will be a lower required rate of return and it should be leading to a higher valuation of stocks.

jeff jeffy answered 2 years ago

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