Question pricing stocks suppose the initial dividend paid, Ask an Expert

Economics

Question: Pricing stocks: Suppose the initial dividend paid by a stock is $10 per year. Let the interest rate and the growth rate of dividends be given by the table below:

2301_Interest rate.png

(a) For each case, compute the value of the stock according to the simple theory developed in the chapter.

(b) What happens as the growth rate of dividends gets closer and closer to the interest rate? Why?

(c) What does this imply about using a plot of the price-earnings ratio in the stock market to identify bubbles or the mispricing of individual stocks?

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M93106869

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