[Yello]

An analyst expects a company to pay a dividend of $5 with a dividend growth rate of 3%. The inflation rate is expected to fall from 5% per year to 3% per year. As a result of the change in the inflation premium, the company’s

Stock price will likely decrease.
Cost of equity will likely remain stable.
Cost of equity will likely decrease.
Stock price will likely remain stable.

The answer is c. Can somebody please explain why? Thank you!

[monikernc]

Look through these questions with solutions to grasp better the math and concepts behind the question.Your particular question is not on this but they all address the topic you are studying.

http://userwww.sfsu.edu/li123456/sample2-819.doc

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[CPAHOPE]

It impacts the stock price when there is changes in inflation rate. Since stocks are part of equity, it wiĺl decrease the equity

[Yello]

Thanks!!

[Author]

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