1. If r_s increases to 10%, what would be the value of the constant growth stock? (Note: D₀ is $1.15 and the expected constant growth rate g = 4%.)

1. $29.90
2. $19.93
3. $10.87
4. Undetermined

2. When r_s increases from, say, 8% to 10%, the value of the constant growth stock:

1. Increases because the interest rate is higher.
2. Decreases because its dividends are being discounted at a higher rate.
3. Remains the same because it is a "constant growth" stock.
4. Might either increase or decrease.

3. Move the slider so that r_s is 12%. If the stock were selling on the market for $15.50, would you buy it? (Note: D₀ is $1.15 and the expected growth consstant rate g = 4%.)

1. Yes, it is a bargain.
2. No, the stock is overvalued, as the expected stock price is only $14.95.
3. Not enough information to determine whether it would be a good buy.

4. The slider for r_s is limited to a minimum of 4.1% so that r_s is always greater than g. Move the slider to the minimum and observe how the present value of the stock changes. Must r_s be greater than g?

1. No reason r_s needs to be greater than g because the formula adjusts the value of the stock appropriately.
2. Yes, because if r_s were not greater than g, then the graph would be too large to display easily.
3. Yes, because if r_s = g, then the formula divides by zero, producing an infinite value.

Conceptual Overview: Explore how the value of a stock changes as a function of the discount interest rate. anticipated growth rate of g=4%. Use the slider to change rs and observe the corresponding changes in the equilibrium price of the stock. P^0=t=1PVDt=rsgD0(1+g)=0.080.04$1.15(1+0.04)=$29.90