Question

Consider the human capital growth model. Let us make the following changes. Depending on whether the current calendar year is an odd or even number, the efficiency parameter of the human capital accumulation technology changes between 5.15 and 2.04. In particular, when the calendar year is an odd number (for example in years 1 and 3) the parameter b is 5.15 and z is 6. However, in even years (for example in years 2 and 4) the parameter is 2.04 and z is 3. Also, let us assume that in each odd year u = 0.8 and in each even year u = 0.5. Let the human capital level at the beginning of period 1 be H1 = 1. Each consumer has one unit of time which can be allocated between work and accumulating human capital.

1. Calculate the human capital level for years 2, 3 and 4.

2. Calculate the consumption level for years 2, 3 and 4.

3. After how many years will the consumption double?

Answer 1

In the case of TFC, after using the constant growth model formula:

P = D1/r-g, where P = current stock price, D1 = Value of the dividend for next year, r = cost of the equity capital, g = constant growth rate

we can calculate the price of the TFC stock by using the above formula. In this case the growth model gives a value of 220 and the current market price is 220.26. So the stock is overvalued by 0.26 (220.26-220) because the current market price of the stock is greater than the intrinsic value.