In the constant-growth model we can apply the equation that P = D ÷ (r-g) only under the assumption that r > g. Suppose someone tries to argue with you that for a certain stock, r < g forever, not just during a temporary growth spurt. Why can’t this be the case? What would happen to the stock price if this were true? If you try to answer simply by looking at the formula you will almost certainly get the wrong answer. Think it through.
Answer to relevant QuestionsRoban Corporation is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Roban have decided to make their ...1. The analyst who produced report A makes the assumption that Vegas Chips will remain a small, regional company that, although profitable, is not expected to grow. In this case, Vegas Chips’ management is expected to ...Over the last 111 years, 1981 was the top year for nominal bill returns and 1982 was the top year for nominal bond returns. Why do you think that these two years saw such high returns on bonds and bills? David Rawlings pays $1,000 to buy a five-year Treasury bond that pays a 6% coupon rate (for simplicity, assume annual coupon payments). One year later, the market’s required return on this bond has increased from 6% to 7%. ...Use the data below to calculate the standard deviation of nominal and real Treasury bill returns from 1972-1982. Do you think that when they purchased T-bills investors expected to earn negative real returns as often as they ...
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