The current expected value of a stock is $32. If investors demand a higher rate of return of 10 percent instead of the 8 percent rate of return, what will the impact on the stock price of the firm be?
A. The stock price will increase by 10 percent.
B. The stock price will not be affected by the change in the rate of return.
C. The stock price will increase to $35.
D. The stock price will reduce to zero.
E. The stock price will decrease as a result of the higher rate of return demanded by investors.
Answer: E
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