Question

A high amount of short interest is typically considered as a __________ signal and contrarians may consider it as a _________ signal.

A. bearish; bullish

B. bullish; bearish

C. bearish; false

D. bullish; false

A NYSE listed firm is planning on paying its first dividend of $2 after two years. Then dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today?

A. $25.00

B. $16.87

C. $19.24

D. $20.99

You find that the confidence index is down, market breadth is up, and the trin ratio is down. In total how many bullish signs do you have?

A. 0

B. 1

C. 2

D. 3

Answer 1

1. The answer is bearish and bullish

Short interest shows sentiments of investors. An increase and decrease in short interest signals that investors are bullish and bearish respectively.

2. This is a two stage Dividend Discount Model problem. The formula for DDM is  

P_o is the current stock price

g is the constant growth rate in perpetuity expected for the dividends

r is the constant cost of equity capital for that company (or rate of return)

D₁ is the value of the next year's dividends

In this first you will have to find out the share price at the end of year 2

P₂= $25

Now calculate present price P_o. Since, company has not paid the dividend in first two years. So

P_o = $19.24

3. The number of bullish signal is 2