Finance qs 7

Question 1We typically claim that stock prices are equal to the present value of their payoffs. What dynamics in the real world cause this to happen?A. Market-makers are obligated to post prices equal to present values.B. Arbitrage in financial markets.C. Government regulations force prices to be equal to present values.D. None of the above statements are correct.Question 2Consider a bond with face value of $2,000 which pays a 4% annual coupon (this is the interest payment). The bond matures in 12 years. The current yield on bonds with similar characteristics is 3%. Assume that the first interest payment is one year from now – calculate the current price of the bond.Question 3The market expects the dividends paid by Company X to grow at a constant rate equal to g. The current ex-dividend price of the stock is $40. The value of the first dividend to be paid next period is $1.20 and the discount rate is 5%. What is the growth rate, g, of the stock?Question 4Consider a case of perfect capital markets without frictions or taxes. In addition, suppose that proficient arbitrageurs are active in this market, so that all arbitrage opportunities have been taken away. Company Y’s stock currently trades at $12 per share. Tomorrow, it will pay a dividend of $3. What is the ex-dividend price of the stock?Question 5Calculate the market capitalization rate for a firm that has no growth opportunities and pays all earnings out in the form of dividend payments. Analysts expect the firm’s earnings to stay constant going forward, at $5 per share. The current stock price of the firm is $60.Question 6Analysts expect Company Z’s dividends to grow at a constant rate of 5% per year. The firm is just about to pay a dividend amount equal to $10. Let the discount rate be 8% per year. What is the current stock price?Question 7[Exam-type Question] The Giraffe Corporation pays dividends on an annual frequency. One year from now the firm will pay its next dividend, which market analysts expect to be $10. The analysts expect that the dividend will grow at g1 = 20% for 3 years, after which it will grow at g2 = 3% in perpetuity. The market capitalization rate for the firm is 6% – what is the current stock price?