GDB solution FIN622... Answer: In graph 1, required rate of return (r) and expected growth rate of dividend (g) have a direct relationship i.e. with the decrease in ‘g’ there is a decrease in ‘r’ as well. Whereas in graph 2, there is an inverse relationship between ‘r’ and ‘g’ i.e. with an increase in growth rate the expected rate of return decreases. In graph 1, Due to bearish trend prices of stock in all 4 cases are declining. The prices are patterned in a downward trend So, is the growth rate (g) and required rate of return (r). Indicating support. According to the assumption of chartists, investors focus mainly on the terminal prices. So, with falling rates the prices relatably falls down. In graph 2, Because of a bullish trend prices of stock in all 4 cases are escalating. The prices are ceiling upward because of the increasing growth rate (g) and decreasing required rate of return (r). Indicating resistance. According to Gordon Growth Model a stock is considered valuable when it’s required rate of return (r) decreases or the expected growth rate (g) increases. So logically it is true that P◦ is and will grow. Thank you!
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