Assuming the Discounted Dividend Model (DDM) with a constant dividend growth rate g, what is the ceteris paribus effect of an increase in the rate of return (r) that investors demand from a given stock on the market price of the stock? What is the effect of a decrease in the expected (constant) growth rate of the company (g), on the market price of the stock? (In computational problems, show the basic equation(s) you used to solve the problem. In verbal problems, briefly explain your choice and why you dismissed the other answers)

1. An increase in r should decrease the price of the stock; a decrease in g should also decrease the price of the stock.
2. An increase in r should decrease the price of the stock; but a decrease in g should oppositely increase the price of the stock.
3. An increase in r should increase the price of the stock; a decrease in g should also increase the price of the stock.
4. An increase in r should increase the price of the stock; but a decrease in g should oppositely decrease the price of the stock.
5. None of the above