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Tutorial Questions #$5$ ECON$7200$

Why might the efficient market hypothesis be less likely to hold when fundamentals suggest stocks should be at a lower level?

Compute the price of a share of stock that pays a $$5$ per year dividend and that you expect to be able to sell in one year for $$20,$ assuming you require a $20\%$ return.

The current price of a stock is $$55\mathrm{.}68.$ If dividends are expected to be $$0\mathrm{.}80$ per share for the next five years, and the required return is $6\%,$ then what should the price of the stock be in $5$ years when you plan to sell it$?$ If the dividend and required return remain the same, and the stock price is expected to increase by $$1$ five years from now, does the current stock price also increase by $$1?$ Why or why not?

A company has just announced a $3-$for$-1$ stock split, effective immediately. Prior to the split, the company had a market value of $$5$ billion with $100$ million shares outstanding. Assuming the split conveys no new information about the company, what are the value of the company, the number of shares outstanding, and the price per share after the split? If the actual market price immediately following the split is $$17\mathrm{.}00$ per share, what does this tell us about market efficiency?

What basic principle of finance can be applied to the valuation of any investment asset?

What are the two main sources of cash flows for a stockholder? How reliably can these cash flows be estimated? Compare the problem of estimating stock cash flows to the problem of estimating bond cash flows. Which security would you predict to be more volatile?

Some economists think that central banks should try to prick bubbles in the stock market before they get out of hand and cause later damage when they burst. How can monetary policy be used to prick a market bubble? Explain using the Gordon growth model.