EBK ECONOMICS TODAY
18th Edition
ISBN: 9780133920116
Author: Miller
Publisher: YUZU
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Question
Chapter 21, Problem cFCT
To determine
Reason for inverse relation between stock values and market interest rate.
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What happens to interest rates in the market if the stock brokerage commission declines? Explain the reason for your answer!
Consider two firms
(a) Firm A has profits twice as large as Firm B's
profits. The firms do not differ in any other
way. Which firm's stock should you buy if Firm
A's stock price is PA = $50 and Firm B's
stock price is PB = $30? What would you
expect to happen to stock prices in
equilibrium?
Explain your answer
(b) Suppose stock prices are in equilibrium.
Explain what happens to the stock prices of
these
two firms if the interest rates increase?
(c) Suppose stock prices are in equilibrium.
Does the Efficient Market Hypothesis suggest
to
%3D
buy one stock or the other stock? Explain.
Suppose that the initial dividend on a stock is £1. The interest rate is 3 percent and the growth rate of dividends is constant at 2 percent. What is the price of the stock?
Chapter 21 Solutions
EBK ECONOMICS TODAY
Ch. 21 - Prob. 21.1LOCh. 21 - Prob. 21.2LOCh. 21 - Prob. 21.3LOCh. 21 - Prob. 21.4LOCh. 21 - Prob. aFCTCh. 21 - Prob. bFCTCh. 21 - Prob. cFCTCh. 21 - Prob. dFCTCh. 21 - Prob. eFCTCh. 21 - Prob. 1CTQ
Ch. 21 - Prob. 2CTQCh. 21 - Prob. 1FCTCh. 21 - Prob. 2FCTCh. 21 - Prob. 1PCh. 21 - Prob. 2PCh. 21 - Prob. 3PCh. 21 - Prob. 4PCh. 21 - Prob. 5PCh. 21 - Prob. 6PCh. 21 - Prob. 7PCh. 21 - Prob. 8PCh. 21 - Prob. 9PCh. 21 - Prob. 10PCh. 21 - Prob. 11PCh. 21 - Prob. 12PCh. 21 - Prob. 13PCh. 21 - Prob. 14PCh. 21 - Prob. 15PCh. 21 - Prob. 16PCh. 21 - Prob. 17PCh. 21 - Prob. 18P
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- Suppose you buy a house for $250,000. One year later, the market price for the house has fallen to $200,000. What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent?arrow_forwardSuppose you expect a stock to pay a dividend of $10 every year forever and the discount rate is fixed at 5%. What would expect the price of that stock to be? What happens to the price of the stock if the discount rate falls to 2%? (Note: this exercise might help explain why the stock market is so high these days, despite the COVID-19 pandemic and lackluster economy.)arrow_forwardSuppose you buy a house for $250,000. One year later, the market price for the house has fallen to $200,000. What is the return on your investment in the house if you made a down payment of 10 percent and took out a mortgage loan for the other 90 percent? Use the editor to format your answerarrow_forward
- Fortune magazine regularly publishes a list of the “most respected” companies. According to the efficient markets hypothesis, if you restrict your stock portfolio to these companies, will you earn a better-than-average return? Explain.arrow_forwardThe relationship between a bond and its price is easier to determine than the relationship between a stock and its price.True or Falsearrow_forwardA company has announced a profit, but why is the price of stock still falling? Is the market inefficient? Explain.arrow_forward
- What is the value of a preferred stock that pays a perpetual dividend of $120 at the end of each year when the interest rate is 3 percent?arrow_forwardRegarding the previous page, consider you and your partner are planning to become a franchise of an international food chain (L’Osteria, Subway, ...) and think about the following problems: • What impact do you think current economic conditions have on your investment plan • Explain the nature and the current status of risks involved in your plan.arrow_forwardWhy might a company’s stock price fall after record earnings are announced? Conversely, why might the stock price increase after losses are disclosed?arrow_forward
- Suppose that you have bought a total of 3400 shares of stock of a particular company. You bought 1300 shares of stock at $17 per share, 1000 shares of stock at $12 per share, and the remaining shares at $22 per share. What is the average price you paid per share of stock? (please round your answer to 2 decimal places)arrow_forwardSolve it clearlyarrow_forwardYour bank account pays an interest rate of 4 percent. You are considering buying a share of stock in XYZ Corporation for $110. After 1, 2, and 3 years, it will pay a dividend of $5. You expect to sell the stock after 3 years for $120. Is XYZ a good investment?arrow_forward
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