Question: (17.5) In an economy, aggregate dividends paid by companies are expected to grow in line with GDP. The trend rate of growth of GDP is

(17.5) In an economy, aggregate dividends paid by companies are expected to grow in line with GDP. The trend rate of growth of GDP is 2.5% per annum. The required rate of return on equities equals a safe rate plus a risk premium. The safe (real) rate is 3%, and the risk premium is 5%. What would you expect the dividend price ratio (or the dividend yield) to be? By how much would stock market prices change if the risk premium increased to 6%?

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