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2. a) Why might there be limits to arbitrage? (30 marks) b) Company X has market consensus expected perpetual earnings of 1.25 per share and
2. a) Why might there be limits to arbitrage? (30 marks) b) Company X has market consensus expected perpetual earnings of 1.25 per share and a current market price of a price of 15 at t=0. Calculate its constant expected rate of return. (15 marks) c) Suppose a small number of investment analysts believe that Company X's recently released product will be more successful than anticipated by the market. They think Company X will achieve perpetual earnings of 1.50 per share. If they are correct what should the market price of the company be? (15 marks) d) Suppose at the end of t=1 the share price is 17.50, at the end of t=2 price equals its long-run equilibrium of 18.00. Evaluate how behavioural finance can explain this result. (40 marks) (Total 100 marks)
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