If the growth rate of dividends increases and the required rate of return stays the same, the stock price will

Rise

Explanation:

Using the Gordon Growth model to calculate stock price, if growth rate were to rise and required return remained the same, the stock price will rise.

The formula is;

Stock price = (Dividend * (1 + growth rate)) / ( required return - growth rate)

Looking at the formula, if growth rate increases, the numerator will increase and the denominator will decrease. This combined, will increase stock price.

For instance, assume growth rate is 5%, required return is 10% and dividend is $1

Price = (1 * 1.05) / (10% - 5%)

= $21

Growth rate increases to 7%

Price = (1 * 1.07) / (10% - 7%)

= $35.67

Price increased.

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