Compute the new price for stock

Assignment Help Business Economics
Reference no: EM133078916

Consider two stocks. For each, the expected dividend next year is $100, and the expected growth rate of dividends is 3 percent. The risk premium is 3 percent for stock x and 8 percent for stock y. The economy's safe interest rate is 5 percent.

a. Use the Gordon growth model to compute the price of each stock. Why is one price higher than the other? What does the difference in risk premiums tell us about the dividends from each stock? Please show all your steps and explain your answer to get full points.

b. Suppose the expected growth rate of dividends rises to 5 percent for both stocks. Compute the new price for each stock. Which stock's price changes by a larger percentage? Explain your answer. Please note, you need to show all your steps and explain your answer to get full marks

Reference no: EM133078916

Questions Cloud

Satisfaction of three stakeholders : Identify any three stakeholders in Walmart that may affected by proposed change. Do organization's views on ethical standards conform to or differ from practice
What is similar and different between the globalization : What is similar and different between the globalization which existed in the late 19th century compared with today's globalization.
What are limitations of dashboards : Explain how executive dashboards can lead to better business insights. What are the limitations of dashboards?
Why are prices advantageous over a system : 0n the producer side, why are prices advantageous over a system where each producer would make some amount of goods along their PPF?
Compute the new price for stock : Consider two stocks. For each, the expected dividend next year is $100, and the expected growth rate of dividends is 3 percent. The risk premium is 3 percent fo
Explain the financial investment and economic investment : 1. What is the difference between financial investment and economic investment?
How much is the taxable income : Amando took out a life insurance policy for P1,000,000.00 naming his wife as beneficiary. How much is the taxable income
Evaluate various financial information : You are a recently appointed board member to a hospital system and have been asked to do research on a possible bond to finance a major hospital renovation
What was total assets on abc balance sheet : Last year the company also borrowed an additional $320,000 from the bank. What was total assets on ABC's balance sheet at the end of the year

Reviews

Write a Review

Business Economics Questions & Answers

  Diesel engine will have guaranteed residual value

A12-cylinder heavy-duty diesel engine will have a guaranteed residual value of  $ 1000 in 5 years. Today (year 0) the equivalent worth of this engine is how much if the interest rate is 9% per year?

  Explain returns to scale

Discuss the economic concept of the long-run average cost curve and how it can be used to explain returns to scale, taking into account the factors that result

  Expansionary policy is used to fix an expansionary gap

Expansionary policy is used to fix an expansionary gap. If US prices are relatively high, the quantity of US goods demanded is high, aote. The short-run AS curve overall has a positive slope in part because of the misperceptions.

  What is the spring constant of the spring

A 0.20-kg metal sphere oscillates at the end of a vertical spring.As the spring stretches from 0.13 to 0.21 m (relative to itsunstrained length), the speed of the sphere decreases from 5.3 to4.6 m/s. What is the spring constant of the spring?

  Mark cuban insider trading scandal

Research the Mark Cuban's Insider Trading Scandal and find out what is "insider trading" and why it is illegal.

  Explain why an increase in capital per worker

Explain why an increase in capital per worker reduces the growth rate of capital per worker.

  Budget constraint is tangent to an indifference curve

Suppose you have $120 to spend on food and clothing. The price of food is $4 and the price of clothing is $8. a, Graph your budget constraint; calculate the slope of it. b, Briefly explain why your optimal choice is the point at which your budget con..

  Consumer is currently spending all of her income

Suppose that a consumer is currently spending all of her income on 10 units of goods A and 5 units of goods on B. The price of A is $4.00 per unit, the price of good B is $10.00 per unit, the marginal utility of the last unit of good A consumed is 20..

  Observations collected in regression study on two variables

Given are five observations collected in a regression study on two variables.

  Supply and demand for loan able funds model

Consider a closed economy. Use the supply and demand for loan able funds model to predict the effects of the following events on interest rates and investment.

  Production possibilities curves are parallel straight lines

Two countries will have zero incentive to trade if their production possibilities curves are parallel straight lines because. One country has a comparative advantage in the production of both goods, thus providing that country with no incentive for t..

  File storage and management

Managing files and folders may seem like mundane work, but file storage and management is one of the most critical operations a technician can master.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd