Question 8 A share has a BE of 1.2 and sells for a price Po= £50 today. It will pay a dividend di of £6 at the end of the year. Further assume that rF 6% and E[rM] = 16%. So, assuming that capital markets are efficient, what will the share's expected price be at the end of the year? Explain.
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![Question 8
A share has a BE of 1.2 and sells for a price Po= £50 today. It will pay a dividend di of £6 at
the end of the year. Further assume that rF= 6% and E[rM] = 16%. So, assuming that capital
markets are efficient, what will the share's expected price be at the end of the year? Explain.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff1d390b7-d22e-4e24-94c4-fd747ca1a914%2F86903e9f-b7eb-41de-b8dc-c6bad53ea30c%2Fr19sge_processed.jpeg&w=3840&q=75)
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- The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain.e) There is a business cycle expansion, so both supply and demand shifts. After the shift, thenew demand curve is given by: D = 4000 + X − 2P, whereas the new supply curve is S =2P + 200. For which values of X will the interest increase/decrease? Which values of X arein line with empirical data?The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate?Carnes Cosmetics Co.'s stock price is $60, and it recently paid a $1.25 dividend. This dividend is expected to grow by 27% for the next 3 years, then grow forever at a constant rate, g; and rs = 14%. At what constant rate is the stock expected to grow after Year 3? Do not round intermediate calculations. Round your answer to two decimal places.
- A stock you are evaluating is expected to experience supernormal growth in dividends of 12 percent over the next three years. Following this period, dividends are expected to grow at a constant rate of 4 percent. The stock paid a dividend of $1.50 last year and the required rate of return on the stock is 11 percent. Calculate the stock's fair present value. (Do not round intermediate calculations.) Please show all the steps, including the equation(s).Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below Stock Price 100 90 80 95 80 90 70 70 60 60 50 50 40 30 20 10 0 October November December January Feburary March (a) (b) O Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? In January, which month should Person B rather use as reference point in order to maximize their value? (d) [ Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum…b) A stock you are evaluating just paid an annual dividend of £2.50. Dividends have grown at a constant rate of 1.5% over the last 15 years and you expect this to continue. i. If the required rate of return on the stock is 12%, what is the fair present value? If the required rate of return on the stock is 15%, what should the fair value be four years from today? ii.
- Calculate the value of a stock that is expected to pay a constant dividend of $1.05per year if the required return is 11%.Submit All Question 28 of 30 Suppose Jon decides to purchase either a long-term Treasury bond or a share of stock from a company in the Dow Jones Industrial Average. Assume that either one will behave similarly to the average security in their class, and ignore the effect of market conditions. Which security is more likely to lose most of its value in the next year after Jon purchases it? O the probabilities of major loss are the same they are both guaranteed to increase in value the stock the bond Based on historical returns, which security is likely to grow more significantly in value after Jon purchases it? the bond 8:27 PM a 46°F E 4) 12/15/202Matollows and 250 shillings in the following year. After that, dividends are expected to grow at constant 5% per year. If the required rate of return is 10%, what price should investors pay for such shares today? 4. Suppose a firm is considering a project that would require an initial cash outlay of 15 million shillings and expected to generate shs 4.5 million each year for the next 4 years. The firm assumes that the prices and costs increases at the same rate and that the required rate of return expressed in nominal terms is 14%. The firm also practices a policy whereby cash flows are stated at the prices of period zero. The inflation rate is expected to be 5%. (a)Outline two ways in which the effects that inflation has on the acceptability of investment projects could be considered. (b)Using the NPV technique, is the project worth taking? What have you learned from your analysis as far as treating inflation in investment analysis is concerned? 30/2021 4:39:41 PM Page 1 of 2
- 1. Consider a wine dealer who has k bottles of wine. The dealer can sell them now (t = 0) or can store it for some time and then sell them later. The value of k bottles at t-th month is given by: Vt = ket The dealer can use the sales revenue as principal in a risk-free investment at rate r. (d) If the risk free rate is 5%, what is the optimal timing of sales?What process does the net present value method use to help management determine whether a project is acceptable to a company? Options : A. It discounts net cash flows to their present value and then compares that value to the capital outlay required by the project.B. It determines the interest rate that will cause the present value of the capital expenditure to equal the present value of the expected net cash flows.C. It divides the present value of net cash flows by the initial investment to determine the profitability index of the project.D. It identifies the time period required to recover the cost of the capital investment from the net annual cash flow produced by the project.a) Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. What is the future value of the $350 after 4 years? b) Suppose you are deciding whether to buy a particular bond from your local municipality. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. Assume the interest rateis6percent. Underwhatcircumstanceswillyoubuythebond?Meaninguptowhatpriceareyou willing to pay.
