Holding other factors in the Gordon model constant, if the market risk premium increases, the expected...

Holding other factors in the Gordon model constant, if the market risk premium increases, the expected price of the stock would fall." True or false?

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Expert Solution

Answer:

TRUE

Reason: According to Gordon Model, the value of the firm is affected by the future flow of dividends, in other words it is used to value a firm that is in 'steady state' with dividends growing at a rate that can be sustained forever.

If the market risk premium increases, it will lead to lower returns and thus the expected stock price of the stock would fall.

jeff jeffy answered 2 years ago

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