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Assume you are using the dividend growth model to value stocks. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect the:

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Answer:

The answer is 'market values of all stocks to decrease'

Explanation:

Using the dividend growth model to value stocks, the formula is:

Po = D1/r - g

Po is the market value of stock

D1 is the future dividend

r is the rate of return on stock

g is the dividend growth rate.

All things being equal, if rate of return on equity increases, market values of all stocks to decrease. As you can see in the formula that the two variables are inversely related.

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