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3. Again use Excel. Suppose a company is expected to pay dividends worth $100 in each of the next 20 years and then disappear.
3. Again use Excel. Suppose a company is expected to pay dividends worth $100 in each of the next 20 years and then disappear. a. Suppose the market interest rate is 5%. How much would the company's stock be worth today? b. Suppose new information comes in that the firm's product will temporarily be in greater demand, so the company will be earning extra profit in the next few years. Therefore, the dividends are expected to be $200 for the first 5 years, and then $100 for the following 15 years. What is the price of the stock in this case? c. (This is tricky, think carefully). Now let us get back to the stream of dividends equal to $100 every year. Suppose that the Fed lowers the interest rate to 2% for three years and after that the interest rate is expected to go back to 5%. What is the price of the stock in this situation? d. There are companies traded at the market which do not pay dividends at all. Yet, their stocks are traded at high prices. How can you explain such a phenomenon? Does it not contradict the present value model we study here?
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