(a) (b) What is the relationship between a firm's profits and its stock price? If the decrease in Burberry's profits had not been a surprise, would the effect of the announcement on its stock price have been different? Briefly explain.

(a) (b) What is the relationship between a firm's profits and its stock price? If the decrease in Burberry's profits had not been a surprise, would the effect of the announcement on its stock price have been different? Briefly explain.

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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АВС XYZ Discount rate (r) Historical growth rate of 0.015+2*0.085=0.185 0.015+1.5*0.085=0.142 (58/30)^(1/30)-1=0.022 Not available. Cannot dividends compute without dividends Sustainable growth rate Fundamental value using dividend growth model with the historical growth rate Fundamental value using the 467*(1+0.185)/(0.185-0.045) dividend growth model with =3953 the sustainable growth rate Fundamental value using residual income growth 0.15*(1-0.7)=0.045 467*(1+0.185)/(0.185-0.022) 0.2*(1-0)=0.2 Not available. Cannot =3395 compute without dividends Not available. Cannot compute without dividends 80*(1+0.022)-(550*0.022)/(0. 185-0.022)=427.36 Not available. Cannot compute without dividends model with the historical growth rate Fundamental value using the 80*(1+0.045)-(550*0.045)/(0. residual income growth 12*(1+0.2)-(100*0.2)/(0.142- 0.2)=96.5 185-0.045)=420.35 model with the sustainable growth rate
If you were an investor considering purchasing the stock of a company and you were concerned about the company's ability to produce income or operating success for a given period of time, which of the following trends would worry you most? O a decreasing inventory turnover ratio an increasing return on common stockholders' equity ratio O a decreasing return on assets ratio an increasing current ratio
If the stock market is efficient, why do companies manage their earnings? O To avoid violating debt covenants. O To receive bonuses based on reported earnings. O Because companies do not believe the Efficient Market Hypothesis. O All of the above.
If the Modigliani and Miller hypothesis about dividends is correct, and if one found a group of companies which differed only with respect to dividend policy, which of the following statements would be most correct? Group of answer choices None of these statements is true. All of these statements are true. The total expected return, which in equilibrium is also equal to the required return, would be higher for those companies with lower payout ratios because of the greater risk associated with capital gains versus dividends. If the expected total return of each of the sample companies were divided into a dividend yield and a growth rate, and then a scatter diagram (or regression) analysis were undertaken, then the slope of the regression line (or b in the equation D1/P0 = a + b(g)) would be equal to +1.0. The residual dividend model should not be used, because it is inconsistent with the MM dividend hypothesis.
When a company participates in a stock buyback program, it means that the company is buying shares of its own stock and taking them off the market. With this simple definition in mind, how would a company's stock buyback program affect its Earnings per Share?
Explain why the following statement is wrong: “The stock price is equal to the value of equity, divided by shares outstanding. Therefore, companies should avoid issuing equity because the number of shares outstanding goes up and thus the stock price would decrease."
Ultimately what determines the value of a share of common stock? Which would be more appropriate for evaluating your company's stock price, a constant or non-constant growth model, and why?
What are the factors that contribute to the temporary drop in a company's share price after a capital-raising plan is announced?
According to the Gordon dividend model, which of the following variables would not affect a stock's price? the firm's expected growth rate in dividends the number of shares outstanding the shareholder's required return next year's expected dividend
What are the conditions for stock market efficiency? Is it possible that market for individual stocks could be highly efficient but market for whole companies could be less efficient? Explain

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