Question:

(a) Describe why the discount rate equals opportunity cost of capital?

(b) "Nominal rate less inflation rate is equal to real rate of return" - Is it true? Why or why not?

(c) A stock is expected to offer an EPS of Rs. 10 next year. It follows a payout policy of 40%. All reinvested earnings are expected to offer a return of 15% which is equal to required rate of return. Suppose the company decides to increase the payout policy from 40% to 70%. What is the consequence of the decision on the stock price?

(d) Some stocks sell at a value more than Earnings of the next year divided by required rate of return. Suppose the markets are efficient, why should market offer a value more than the value derived above?

(e) "When the central bank changes the interest rate, bond prices react negatively" - Is it true? Why or why not