17. A stock which is sold at its face value of $4,000 is expected to pay a dividend of $120 for the next three years. It is expected that the price of this stock will increase by 6% of its initial face value each year. The nominal interest rate is 3% per year. What is the risk premium payable on this stock to induce investors to hold the stock for another two years? Risk premium (x) = (Round your answer to two decimal places.) In the second year, the rating of the company issuing this stock falls and the policy rate is increased. This leads to a change in both the risk premium and the nominal interest rate by 15%. Assume that the other variables determining stock prices remain unchanged. What will be the price of the stock in the second year? The price of stock in the second year(Q+1)= $[ (Round your answer to two decimal places.) Suppose that instead of a contractionary monetary policy, a contractionary fiscal policy was brought into effect, to reduce the budgetary deficit of the country. The investors expect that the central bank will not change its policy rate. The central bank faces a horizontal LM curve and wants to maintain a steady rate of inflation. The central bank, therefore, decreases the policy rate to completely compensate for the effects of the fiscal policy on output. How will these policy changes affect stock prices? A. The stock prices will decrease, because of a fall in the policy rate. B. The stock prices will increase as, in the economy, the output is unchanged, but the policy rate is now at a lower leve C. The exact effect on the stock prices is not predictable, as the investors may interpret the same news differently at di
17. A stock which is sold at its face value of $4,000 is expected to pay a dividend of $120 for the next three years. It is expected that the price of this stock will increase by 6% of its initial face value each year. The nominal interest rate is 3% per year. What is the risk premium payable on this stock to induce investors to hold the stock for another two years? Risk premium (x) = (Round your answer to two decimal places.) In the second year, the rating of the company issuing this stock falls and the policy rate is increased. This leads to a change in both the risk premium and the nominal interest rate by 15%. Assume that the other variables determining stock prices remain unchanged. What will be the price of the stock in the second year? The price of stock in the second year(Q+1)= $[ (Round your answer to two decimal places.) Suppose that instead of a contractionary monetary policy, a contractionary fiscal policy was brought into effect, to reduce the budgetary deficit of the country. The investors expect that the central bank will not change its policy rate. The central bank faces a horizontal LM curve and wants to maintain a steady rate of inflation. The central bank, therefore, decreases the policy rate to completely compensate for the effects of the fiscal policy on output. How will these policy changes affect stock prices? A. The stock prices will decrease, because of a fall in the policy rate. B. The stock prices will increase as, in the economy, the output is unchanged, but the policy rate is now at a lower leve C. The exact effect on the stock prices is not predictable, as the investors may interpret the same news differently at di
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Concept explainers
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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Transcribed Image Text:17. A stock which is sold at its face value of $4,000 is expected to pay a dividend of $120 for the next three years. It is
expected that the price of this stock will increase by 6% of its initial face value each year. The nominal interest rate is 3%
per year.
What is the risk premium payable on this stock to induce investors to hold the stock for another two years?
Risk premium (x) =
(Round your answer to two decimal places.)
In the second year, the rating of the company issuing this stock falls and the policy rate is increased. This leads to a
change in both the risk premium and the nominal interest rate by 15%. Assume that the other variables determining stock
prices remain unchanged.
What will be the price of the stock in the second year?
The price of stock in the second year(Q+1)= $[
(Round your answer to two decimal places.)
Suppose that instead of a contractionary monetary policy, a contractionary fiscal policy was brought into effect, to reduce
the budgetary deficit of the country. The investors expect that the central bank will not change its policy rate. The central
bank faces a horizontal LM curve and wants to maintain a steady rate of inflation. The central bank, therefore, decreases
the policy rate to completely compensate for the effects of the fiscal policy on output. How will these policy changes affect
stock prices?
A. The stock prices will decrease, because of a fall in the policy rate.
B. The stock prices will increase as, in the economy, the output is unchanged, but the policy rate is now at a lower leve
C. The exact effect on the stock prices is not predictable, as the investors may interpret the same news differently at di
D. The stock prices will remain unchanged as the two policies net out each other and there is no effect on the output in
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