In 2006 and 2007, Kenneth Cole Productions (KCP) paid annual dividends of $0.76. In 2008, KCP paid an annual dividend of $0.33, and then paid no further dividends through 2012. Suppose KCP was acquired at the end of 2012 for $15.38 per share. a. What would an investor with perfect foresight of the above been willing to pay for KCP at the start of 2006? (Note: Because an investor with perfect foresight bears no risk, use a risk-free equity cost of capital of 5.5%.) b. Does your answer to (a) imply that the market for KCP stock was inefficient in 2006? a. What would an investor with perfect foresight of the above been willing to pay for KCP at the start of 2006? (Note: Because an investor with perfect foresight bears no risk, use a risk-free equity cost of capital of 5.5%.) The present value of the cash flows is $14.08. (Round to the nearest cent.) b. Does your answer to (a) imply that the market for KCP stock was inefficient in 2006? (Select all the choices that apply.) A. Probably not. In 2006, investor expectations were likely very different-KCP might have continued to grow. B. Ex-post, the stock is likely to do better or worse than investors' expectations. C. The market would be inefficient if the stock price was overpriced or underpriced relative to what would have been reasonable expectations in 2006. D. The market would be inefficient only if the stock was underpriced relative to what would have been reasonable expectations in 2006.
In 2006 and 2007, Kenneth Cole Productions (KCP) paid annual dividends of $0.76. In 2008, KCP paid an annual dividend of $0.33, and then paid no further dividends through 2012. Suppose KCP was acquired at the end of 2012 for $15.38 per share. a. What would an investor with perfect foresight of the above been willing to pay for KCP at the start of 2006? (Note: Because an investor with perfect foresight bears no risk, use a risk-free equity cost of capital of 5.5%.) b. Does your answer to (a) imply that the market for KCP stock was inefficient in 2006? a. What would an investor with perfect foresight of the above been willing to pay for KCP at the start of 2006? (Note: Because an investor with perfect foresight bears no risk, use a risk-free equity cost of capital of 5.5%.) The present value of the cash flows is $14.08. (Round to the nearest cent.) b. Does your answer to (a) imply that the market for KCP stock was inefficient in 2006? (Select all the choices that apply.) A. Probably not. In 2006, investor expectations were likely very different-KCP might have continued to grow. B. Ex-post, the stock is likely to do better or worse than investors' expectations. C. The market would be inefficient if the stock price was overpriced or underpriced relative to what would have been reasonable expectations in 2006. D. The market would be inefficient only if the stock was underpriced relative to what would have been reasonable expectations in 2006.
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
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The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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Transcribed Image Text:In 2006 and 2007, Kenneth Cole Productions (KCP) paid annual dividends of $0.76. In 2008, KCP paid an annual
dividend of $0.33, and then paid no further dividends through 2012. Suppose KCP was acquired at the end of 2012 for
$15.38 per share.
a. What would an investor with perfect foresight of the above been willing to pay for KCP at the start of 2006? (Note:
Because an investor with perfect foresight bears no risk, use a risk-free equity cost of capital of 5.5%.)
b. Does your answer to (a) imply that the market for KCP stock was inefficient in 2006?
a. What would an investor with perfect foresight of the above been willing to pay for KCP at the start of 2006? (Note:
Because an investor with perfect foresight bears no risk, use a risk-free equity cost of capital of 5.5%.)
The present value of the cash flows is $14.08. (Round to the nearest cent.)
b. Does your answer to (a) imply that the market for KCP stock was inefficient in 2006? (Select all the choices
that apply.)
A. Probably not. In 2006, investor expectations were likely very different-KCP might have continued to grow.
B. Ex-post, the stock is likely to do better or worse than investors' expectations.
C. The market would be inefficient if the stock price was overpriced or underpriced relative to what would have
been reasonable expectations in 2006.
D. The market would be inefficient only if the stock was underpriced relative to what would have been
reasonable expectations in 2006.
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