Pricing stocks: Suppose the initial dividend paid by a stock is $10 per year. Let the interest rate and the growth rate of dividends be given by the table below: Interest rate (percent) Growth rate of dividends (percent) Stock price 0.0 - 2.0 3.0 3.9 0.0 2.0 6. 5.0 1. For each case, compute the value of the stock according to the simple theory developed in the chapter. 2. What happens as the growth rate of dividends gets closer and closer to the interest rate? Why? 6.

Pricing stocks: Suppose the initial dividend paid by a stock is $10 per year. Let the interest rate and the growth rate of dividends be given by the table below: Interest rate (percent) Growth rate of dividends (percent) Stock price 0.0 - 2.0 3.0 3.9 0.0 2.0 6. 5.0 1. For each case, compute the value of the stock according to the simple theory developed in the chapter. 2. What happens as the growth rate of dividends gets closer and closer to the interest rate? Why? 6.

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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You use the usual forward tree model for stocks to construct a binominal tree for modeling the price movements of the stock. You are given: i) The length of the period is 1 year ii) The initial stock price is 100 iii) The stock' s volatility is 30% iv) The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 5% v) The continuously compounded risk-free interest rate is 5% Calculate the price of a two-year 100-strike American call option on the stock. Possible Answers A 11.40 B 12.09 C 12.78 D 13.47 E 14.16
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An analyst gathered the following information for a stock and market parameters: stock beta = 0.757; expected return on the Market = 11.65%; expected return on T-bills = 3.02%; current stock Price = $9.92; expected stock price in one year = $8.20; expected dividend payment next year = $2.92. Calculate the required return and expected return for this stock. Please write your answers as percentages (e.g. 1234 should be written as 12.34): A. Required Return: B. Expected Return: % %
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An analyst gathered the following information for a stock and market parameters: . stock beta= 1.11; expected return on the Market - 9.55%; expected return on T-bills- 2.03%; . current stock Price = $5.62; . . . . expected stock price in one year $11.26; expected dividend payment next year = $2.29. - Calculate the required return for this stock. Please share your answer as a percentage rounded to 2 decimal places.

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