Question 8

(a) Snoop Industries is growing at a rapid pace. Dividends are expected to grow at a rate of 18% for the next 4 years, after which the growth rate will fall off to a constant rate of 6% per year thereafter. The companys next dividend will be 5.25. If the required rate of return is 11%, what is the current price of the share?

(b) Explain what is meant by the Efficient Market Hypothesis. If the Efficient Market Hypothesis is valid, what is the optimal strategy for an ordinary investor? Suppose you observed that high level managers make superior returns on investments on their company stock? Would this be a violation of weak form efficiency? Would this be a violation of strong form efficiency? Explain why or why not.

(c) In bond markets, explain what is meant by the Term Structure of Interest Rates. Explain under what circumstances there would be an upward sloping term structure. Sketch a graph to support your answer.