1. Three scenarios for the drop in the SP500 (25 points) Before the Covid crisis, the price of the SP 500 was equal to 3,300. After the crisis, its price dropped to 2,600. To examine the determinants of this sudden change, we consider a simple Gordon-Shapiro model. In the initial (pre-crisis situation, the required return k is equal to 7% per year and the dividend growth rate g is equal to 3% per year (these parameteres match the historical averages of k and g for the SP500). In addition, investors expect an annual dividend D1 on the SP500 equal to 132 (for simplicity, we assume that the dividends of all the SP500 firm are paid every 12 months). With these assumptions, you can check that the evaluation obtained with the Gordon-Shapiro model is equal to pre-crisis level of the SP500, i.e., we have: E(D) : = 132 0.04 = 3,300. K-9 2. Let us consider the second scenario ("deep recession") in which investors expect the dividends on the SP500 for the first n years to be null (E(D1) = ... = E(Dn) 0), and the expected dividends after year n (n+1, n+2, ...) to remain the same as in the initial (pre-crisis) situation described above. What value of n do you need to match the drop in the SP500 price observed in the data (choose a integer value of n in the set {1, 2,...})? 1. Three scenarios for the drop in the SP500 (25 points) Before the Covid crisis, the price of the SP 500 was equal to 3,300. After the crisis, its price dropped to 2,600. To examine the determinants of this sudden change, we consider a simple Gordon-Shapiro model. In the initial (pre-crisis situation, the required return k is equal to 7% per year and the dividend growth rate g is equal to 3% per year (these parameteres match the historical averages of k and g for the SP500). In addition, investors expect an annual dividend D1 on the SP500 equal to 132 (for simplicity, we assume that the dividends of all the SP500 firm are paid every 12 months). With these assumptions, you can check that the evaluation obtained with the Gordon-Shapiro model is equal to pre-crisis level of the SP500, i.e., we have: E(D) : = 132 0.04 = 3,300. K-9 2. Let us consider the second scenario ("deep recession") in which investors expect the dividends on the SP500 for the first n years to be null (E(D1) = ... = E(Dn) 0), and the expected dividends after year n (n+1, n+2, ...) to remain the same as in the initial (pre-crisis) situation described above. What value of n do you need to match the drop in the SP500 price observed in the data (choose a integer value of n in the set {1, 2,...})