If interest rates decrease, stocks are worth more. Select one: True False

Expert Solution

Solution:-

The Answer of Above Sentence is True.

If interest rate decreses, then stock are worth more. We are understanding the same by example.

Example: -

Question- There are two stocks A and B. which is expected to pay a dividend of $5 in upcoming year. The expected growth rate of dividends is 4% for both stocks. You require a return of 9% on stock A and a return of 8% on stock B. Calculate the Stock Worth (Intrinsic Value).?

Solution:-

To Find Intrinsic value of stock A-

Intrinsic Value =

Intrinsic Value = $100

To Find Intrinsic value of stock B-

Intrinsic Value =

Intrinsic Value = $125

Intrinsic value of stock A will be less than Intrinsic value of stock B.

Interest Rate (9%) = Stock worth $100

Interest Rate (8%) = Stock worth $125.

This sentence became true as interest rate decrease then stock worth more.

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jeff jeffy answered 1 year ago

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