Question

Suppose that in 2020 the expected dividends of the stocks in a broad market index equaled...

Suppose that in 2020 the expected dividends of the stocks in a broad market index equaled $200 million when the discount rate is 7% and the expected growth rate of the dividends is 3%. Using the constant-growth formula for valuation, if interest rates decrease to 5%, the value of the market will change by

A.

50%

B.

50%

C.

100%

D.

-100%

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1
Current Market Value
= Expected Dividend / (Discount Rate - Growth Rate)
= $200 million / (7% - 3%)
= $200 million / 4%
= $5000 million
Market Value after decrease in Interest Rate
= Expected Dividend / (Discount Rate - Growth Rate)
= $200 million / (5% - 3%)
= $200 million / 2%
= $10000 million
Market Value Change by
= (Market Value after decrease in Interest Rate-Current Market Price) / Current Market Value *100
= ($10000 - $5000) / $5000 *100
= $5000 / $5000 *100
= 100%
So answer is C. 100%
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose that in 2020 the expected dividends of the stocks in a broad market index equaled...
Suppose that in 2020 the expected dividends of the stocks in a broad market index equaled $200 million when the discount rate is 7% and the expected growth rate of the dividends is 3%. Using the constant-growth formula for valuation, if interest rates decrease to 5%, the value of the market will change by A. 50% B. -100% C. 50% D. 100%
Expected returns, dividends, and growth The constant growth valuation formula has dividends in the numerator. Dividends...
Expected returns, dividends, and growth The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows: P̂0 = D1/(rs − gL) Which of the following statements best describes how a change in a firm’s stock price would affect a stock’s capital gains yield? a.The capital gains yield on a stock that the investor already owns has an inverse relationship with the firm’s expected future stock...
Assume that stock market returns have the market index as a common factor, and that all...
Assume that stock market returns have the market index as a common factor, and that all stocks in the economy have a beta of 1.7 on the market index. Firm-specific returns all have a standard deviation of 25%. Suppose that an analyst studies 20 stocks and finds that one-half of them have an alpha of +2.5%, and the other half have an alpha of −2.5%. Suppose the analyst invests $1.0 million in an equally weighted portfolio of the positive alpha...
Answer the following questions regarding dividend discount models: What are the two components of most stocks’...
Answer the following questions regarding dividend discount models: What are the two components of most stocks’ expected total return? What is the general formula to calculate the capital gains yield and the dividend yield of a stock (one that holds when firm’s dividends are growing at a constant rate and when they are not)? Write out and explain the dividend discount model formula for a constant growth stock. What is the capital gains yield and dividend yields for a constant...
Assume a market index represents the common factor and all stocks in the economy have a...
Assume a market index represents the common factor and all stocks in the economy have a beta of 1. Firm-specific returns all have a standard deviation of 40%.      Suppose an analyst studies 20 stocks and finds that one-half have an alpha of 2.3%, and one-half have an alpha of –2.3%. The analyst then buys $1.2 million of an equally weighted portfolio of the positive-alpha stocks and sells short $1.2 million of an equally weighted portfolio of the negative-alpha stocks. a....
3.  3: Stocks and Their Valuation: Corporate Valuation Model The recognition that dividends are dependent on earnings,...
3.  3: Stocks and Their Valuation: Corporate Valuation Model The recognition that dividends are dependent on earnings, so a reliable dividend forecast is based on an underlying forecast of the firm's future sales, costs and capital requirements, has led to an alternative stock valuation approach, known as the corporate valuation model. The market value of a firm is equal to the present value of its expected future free cash flows plus the market value of its non-operating assets: Free cash flows...
Suppose a company has 5 million common shares outstanding, which have a market value of $24...
Suppose a company has 5 million common shares outstanding, which have a market value of $24 per share. The most recent annual dividend paid was $2.25/share. The expectation is for an 8 percent constant growth of the firm’s earnings & dividends. The 3-year average yield on 10-year T-Bonds is 5.50%, the expected return on a broad index of common stocks is 11% and the stock is twice as variable as the market average. The capital structure includes also 150,000 15-year...
If you’re a stockholder, you should always try to purchase stocks with a price above the...
If you’re a stockholder, you should always try to purchase stocks with a price above the stock price’s intrinsic value.    True or False? Use the Security Market Line approach to determine the required rate of return. If you had a risk free rate of 8%, market rate of 12% and a beta of 1.1, what is the required rate of return? Using the Constant Growth Model, what is this stock’s intrinsic value: Dividends today are $5.00 and expected to increase...
Hewlett-Packard’s (HP) expected dividends for the coming year are $0.60 and expected earnings per share are...
Hewlett-Packard’s (HP) expected dividends for the coming year are $0.60 and expected earnings per share are $0.80. The required rate of return for HP is 15%. HP’s ROE is 18% and plowback ratio is 25%. Using the constant-growth dividend discount method, calculate the firm’s intrinsic value. (10 points) Calculate the present value of growth opportunities for HP. (10 points) Suppose you found a positive PVGO for HP. In this case, should the firm continue with its current dividend policy or...
The value of a share of common stock depends on the cash flows it is expected...
The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The final price includes the original price paid plus an expected capital gain. The actions of the marginal investor determine the equilibrium stock price. Market equilibrium occurs when the stock's price is -Select-less thanequal togreater...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT