Question

Which of the following is an assumption of the supernormal method of valuing stocks?

a.That the stock will level off at "g" after a period of unusual dividends.

b.That the stock will have unusual dividends forever.

c.That the dividend will increase at a large percentage over the next few years.

d.That the dividend will decrease by a large percentage over the next few years.

e.None of the above.

Joella owns 100 shares in XYZ Company and it is time for the annual board meeting in New York City. Which of the following options might Joella want to exercise in this situation?

a.use her pre-emptive right to purchase more shares.

b.give her proxy away to a member of management.

c.insist on cumulative voting so that she has more power.

d.eliminate classes of stock so that everyone has equal voting power.

e.insist on straight voting so that the large stockholders hold the reins of power.

Ahmad just bought a certificate of deposit at his local bank. The rate printed on the front of the certificate is 6.8%, but Ahman knows that inflation is currently running at 2.15%.
What is the APPROXIMATE real rate of interest that Ahmad is getting?
What is the EXACT real rate of interest that Ahmad is getting? (Two decimal places, please)

Answer 1

1]

(c) That the dividend will increase at a large percentage over the next few years.

In supernormal method, it is assumed that the in the initial few years, the rate of growth of dividends will be very large, after which the the rate of growth of dividends will be normal.

2]

(c) insist on cumulative voting so that she has more power.

With cumulative voting, minority shareholders get more say in the decisions

3]

approximate real rate = nominal rate - real rate = 6.8% - 2.15% = 4.65%

Exact real rate = ((1 + nominal rate) / (1 + real rate)) - 1 = 4.55%