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The asset market we considered in class had a known fixed horizon of T periods, where T is known. Suppose instead, that the horizon was indefinite. Specifically, suppose there is a probability p=1/10 that the asset would cease to have any value in any period (after the dividend was paid), and so with probability 1-p =9/10, the asset will continue to have value. You can think of p as the probability of bankruptcy of the firm issuing the asset.
a) If the dividend payment, d=3 in each period for which the asset had value, what would be the fundamental value of this asset? Hint: what is the expected future value of the asset?
b) Same question as in part a, but where the dividend could take on one of three values, (0,6,12) with equal probability)
c) What is different about the fundamental value in the indefinite horizon case as compared with the finite horizon case studied in class?
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