Chapter 9, Problem 3DQ

You expect KT Industries (KTI) will have earnings per share of $4.6 this year and expect that they will pay out $1.66 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 11% and their equity cost of capital is 16%. KTI's dividend growth rate is _________ (Round to two decimal places) If KTI's dividend growth rate will remain constant, and KTI's next year dividend is $1.78, then KTI's current stock price should be ________ (Round to two decimal places)

Suppose you observe that short-term interest rates are higher than long-term interest rates. a. What expectations must people have regarding future interest rates? b. Why might the above relationship signal a recession? Why might it not? c. What will the yield curve for this problem look like?   Q4 Why is the fact that stock prices follow a random walk a signal of stock market efficiency? What would have to be true if stock prices did not follow a random walk?  

Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal govemment or bonds issued by state and local governments (that is, they consider the bonds the same with respect to default risk, information costs, and liquidity) Suppose that state governments have issued perpetuities (or consoles) with $78 coupons and that the federal govemment has also issued perpetuities with $78 coupons. If the state and federal perpetuites both have after-tax yields of 8%, what are their pre-tax yields? (Assume that the relevant federal income tax rate is 31.13%) * The pre-tax yield on the state perpetuity will be______________% * The pre-tax yield on the federal perpetuity will be_______________%

Although its application continues to spark vigorous debate, modern financial theory is now applied as a matter of course to investment management. CAPM, the capital asset pricing model, is a theoretical representation of the behavior of financial markets and can be employed in estimating a company’s cost of equity capital. Despite limitations, the model can be a useful addition to the financial manager’s analytical tool kit. The expanding work on the theory and application of CAPM has produced many sophisticated, often highly complex extensions of the simple model. Discuss the assumptions that the modern financial theory and CAPM rest on. Discuss whether assumptions that they depend on are realistic or unrealistic. Discuss how the concept of risk is defined or calculated in financial theory and CAPM.

After careful analysis, you have determined that a firm’s dividends should grow at 15%, on average, in the foreseeable future. The firm’s last dividend was $1.5. Compute the current price of this stock, assuming the required return is 20%

INV 1 5aiv Suppose that you have the following utility function: U=E(r) – ½ Aσ2   and A=3 Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum.  You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows: ETFUS : E(r)= 0.070584 standard deviation =   0.173687 ETFCDA  : E(r)= 0.073763 standard deviation =  0.16816  Covariance between ETFUS and ETFCDA = 0.02397 What is the standard deviation for ETFCDA?

Orb Trust (Orb) has historically leaned towards a passive management style of its portfolios. The only model that Orb’s senior management has promoted in the past is the Capital Asset Pricing Model (CAPM). Now Orb’s management has asked one of its analysts, Kevin McCracken, CFA, toinvestigate the use of the Arbitrage Pricing Theory model (APT).McCracken has determined that a two-factor APT model is adequate where the factors are the sensitivity to changes in real GDP and changes in inflation. McCracken’s analysis has led him to the conclusion that the factor risk premium for real GDP is 8 percent while the factor risk premium for inflation is 2 percent. He estimates for Orb’s High Growth Fund that the sensitivities to these two factors are 1.25 and 1.5 respectively. Using his APT results, he computes the expected return of the fund. For comparison purposes, he then uses fundamental analysis to also computethe expected return of Orb’s High Growth Fund. McCracken finds that the two…

Suppose that in a given bond market, there is currentlyno information that can help potential bond buyers todistinguish between bonds. Which bond issuers havean incentive to disclose information about their companies? Explain why

13. Stock quotes - Looking up a stock price The price of a stock is largely influenced by supply and demand. When more people want to buy a stock, the price goes _______  . By contrast, when more people want to sell a stock, the price goes_________ .   You can look up the current price for a stock, and other important numerical measures, by searching for the company (or the stock’s trading symbol) on popular financial or investing websites. Many newspapers also publish abbreviated information in the financial section for many common stocks, bonds, and mutual funds. The following table represents the format of typical price quotes for various stocks that would appear in the financial section of a newspaper: YTD 52 WEEKS       YLD   VOL   NET % CHG HI LO STOCK (SYM) DIV % PE 100S LAST CNG +9.25 56.31 39.04 Global Communications GC 0.36 0.72 23.17 58093 50.06 +1.82 +18.87 48.57 36.55 GermCorp GERM 0.14 0.30 20.48 8134 47.05…