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3. Fill in the blanks (do not explain). (a) Use the dividend discount model (use a calculator). The fair rate of return is 20%. Suppose
3. Fill in the blanks (do not explain). (a) Use the dividend discount model (use a calculator). The fair rate of return is 20%. Suppose the dividend of the company in the past year was 10. If the dividend is expected to remain at 10 forever into the future, the fair stock price equals ___. Alternatively, if the dividend is expected to grow at a constant rate g equal to 10% forever, the fair stock price equals ___. (b) At time t, the strategy for the investor is to buy a stock for 95 (in dollars) and to buy a put option on the stock (the exercise price is 89) for a put price of 5 (the option expires in one year). Suppose the actual stock price in one year equals 60. At time t+1, the actual payoff (in dollars) is ____ and the actual percentage return for the strategy is (c) Use the efficient market theory in the very short run. Dividends and taxes equal O. At time t, the interest rate on bonds is fixed at 8% and the risk premium is fixed at 2%. Suppose that, today, there is an exogenous decrease in the expected future stock price from 110 to 66. Immediately after the exogenous change, investors will _ _(up to 7 words). In the new equilibrium, today's stock price equals (d) Consider interest rate parity. Suppose there is an exogenous increase in the foreign interest rate from 4% to 7%. Hold the domestic interest rate fixed at 5%, and hold the expected future exchange rate fixed. In the very short run, the domestic currency (relative to the foreign currency). In the new equilibrium, domestic residents expect the foreign currency (relative to the domestic currency) over the next year. to (e) The U.S. interest rate on ten-year government bonds was 7.5% in early 1992 and 2% in early 2015. Assume that it is appropriate to use a fair P/E calculation for these years, and let the risk premium on U.S. stocks (in general) be 3.5% in both years. Assuming that the expected growth rate of earnings was 7% in 1992 and 3.8% in 2015, the fair P/E for U.S. stocks was ___ in 1992 and ___ in 2015 (use a calculator)
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