Assume you are using the dividend growth model to value stocks. If you expectthe inflation rate to increase, you should also expect:O A. market value of all stocks to remain constant as the dividend growth willoffset the increase in inflation.B. stocks that do not pay dividends to decrease in price while dividend payingstocks maintain a constant price.C. market value of all stocks to decrease, all else equal.ype here to search10:1210/18/2PrtSenHomeEnd

Formula to find Value of stock using dividend growth model Po = Dps1/(Ke - g) Where, Ke = cost of…

Answered: Assume you are using the dividend…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 26P

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Suppose you observe the following situation: Probability of State 0.25 0.45 0.30 State of Economy Recession Normal Irrational exuberance Stock A Stock B % % Rate of Return if State Occurs Stock B Stock A a. Calculate the expected return on each stock. (Round the final answers to 2 decimal places.) Expected Return % -0.12 0.09 0.44 -0.10 0.09 0.24 b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.75, what is the expected market risk premium? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected market risk premium
Suppose you observe the following situation: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Bust 0.22 -0.12 -0.27 Normal 0.48 0.1 0.05 Boom 0.3 0.23 0.28 Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21. What is the expected market risk premium?
Suppose you observe the following situation: Probability of State 0.35 0.40 0.25 State of Economy Recession Normal Irrational exuberance Stock A Stock B Expected Return Rate of Return if State Occurs Stock B % Stock A a. Calculate the expected return on each stock. (Round the final answers to 2 decimal places.) -0.11 0.10 0.45 -0.09 0.10 0.25 b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.65, what is the expected market risk premium? (Do not round intermediate calculations. Round the final answer to 2 decimal places.) Expected market risk premium
And what are the expected returns for stocks A and B if the conditions are as follows? A0 0.03 k1 0.09 k2 0.07 ba,1 1.5 ba,2 0.8 bb,1 1.2 bb,2 0.6
Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur? a. The required return on a stock with beta = 1.0 will not change. b. The required return on a stock with beta > 1.0 will increase. c. The return on "the market" will increase. d. The return on "the market" will remain constant. e. The required return on a stock with a positive beta < 1.0 will decline.
Consider an event study of the following stock. Realised return Market return t = 0 (event day) 0.1 0.1 t =1 0.06 0.04 t = 2 0.03 0.02 t = 3 0.015 0.01 Suppose that the estimated market model is . What is the CAR (cumulative abnormal returns) for t = 3?
The dividend yield (i.e. D1/P0) is a good measure of the expected return on a common stock under which of the following circumstances? g = 0 g > 0 g < 0 g is expected to remain constant over time under no circumstances
Suppose stock A's return is related to the market return by: RetA=0.6*Market Return + 0.04* (Market Return)² What is the change in stock A given a change in the market return? Suppose stock B's return is related to the market return by: RetB=0.6*Market Return What is the difference in returns between A and B if the market return is 5%? What is the difference if the market return is -5%?
Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession 0.30 0.05-0.15 Normal 0.55 0.15 0.15 Boom 0.15 0.20 0.35 Calculate the expected return for the two stocks.
We know the following expected returns for stock A and the market portfolio, given different states of the economy: State (s) Probability E(rA,s) E(rM,s) Recession 0.3 -0.05 0.02 Normal 0.5 0.1 0.05 Expansion 0.2 0.18 0.09 The risk-free rate is 0.02. Assuming the CAPM holds (expected and required returns are the same) , what is the beta for stock A?
Which of the following will (holding everything else constant) cause the price earnings (P/E) ratio of a stock to decrease: The required return increases The risk-free rate decreases The stock's beta decreases The required return decreases
If the interest rate is approximately equal to the growth rate of dividends, the price of a stock will be close to Select one: a. infinity O b. It is impossible to tell based on the information above O c. 100000 O d. 0

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