What is the current price of the stock

Reference no: EM131133316

Stock prices and the risk premium

Suppose a share is expected to pay a dividend of $1,000 next year, and the real value of dividend payments is expected to increase by 3% per year forever.

a. What is the current price of the stock if the real interest rate is expected to remain constant at 5%? at 8%? Now suppose that people require a risk premium to hold stocks.

b. Redo the calculations in part (a) if the required risk premium is 8%.

c. Redo the calculations in part (a) if the required risk premium is 4%.

d. What do you expect would happen to stock prices if the risk premium decreased unexpectedly? Explain in words.

Reference no: EM131133316

Questions Cloud

What does a steep yield curve imply about future inflation : Explain why an inverted (downward-sloping) yield curve may indicate that a recession is coming.

Qualities of the ideal political leader : Citing specific evidence from Machiavelli's The Prince (not from the textbook), identify, and briefly explain, the qualities of the ideal political leader.

How did strike actions affect european societies : How did strike actions affect European societies during this period? What did the average European think of socialism and communism? What role did socialism and communism play in the First World War?

Write assignment questions on small business basics : Why is the production department of a company important? - Why is the finance department of a company important?

What is the current price of the stock : What do you expect would happen to stock prices if the risk premium decreased unexpectedly? Explain in words.

What were the causes of the first world war : What were the causes of the First World War? What role did Empire and Imperialism play in the First World War? What was life like for soldiers in the trenches? How was it similar for soldiers from opposing sides?

Differences and similarities between western and eastern : Discuss the differences and similarities between Western (Roman Catholic) Christianity, Eastern (Orthodox) Christianity, and Islam.

What role did japanese culture play in provoking genocide : Was there a long history of less-than-good relations between China and Japan? What role (if any) did Japanese culture play in provoking genocide?

Why would christians in the west : Why would Christians in the West be moved to embark on a dangerous journey to fight in the Holy Land after hearing Pope Urban's speech at Clermont?

User Account

All Pages