Question 1

When market participants have adaptive expectations

Accepted Answer

Adaptive expectations refer to the idea that individuals adjust their expectations slowly over time based on past observations and experiences. This means that they do not immediately update their expectations in response to new information, but rather take a more gradual approach. Therefore, choice B is the correct answer. Choices A, C, and D are incorrect because information availability, forecast accuracy, and the ability to predict specific variables are not necessarily related to adaptive expectations.

Question 2

According to the Gordon-Growth model,what will be the percentage change in the value of the stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% per year but now are expected to grow by 1% per year?

Accepted Answer

The answer of According to the Gordon-Growth model,what will be...

Question 3

What are the effects of the double taxation of dividends?

Accepted Answer

The answer of What are the effects of the double...

Question 4

Suppose you buy a stock that sells for $20.It's expected annual dividend is $2 and you expect its price to be $25 in one year.What is your expected rate of return on the stock?

Accepted Answer

The answer of Suppose you buy a stock that sells...

Question 5

According to the Gordon-Growth model,an increase in the required return on equity

Accepted Answer

According to the Gordon-Growth model, the value of a stock is calculated as the next dividend divided by the difference between the required return on equity and the growth rate of the dividend. Therefore, an increase in the required return on equity would decrease the value of a stock, as the denominator in the equation would increase.

Question 6

Expectations of asset values by participants in financial markets

Accepted Answer

The expectations of asset values by participants in financial markets determine both current market prices and changes in market prices. This is because when participants expect an asset's value to increase, they are willing to pay more for it, which drives up the current market price. Similarly, when participants expect an asset's value to decrease, they are willing to sell it for less, which drives down the current market price. These expectations can also lead to changes in market prices as new information or events unfold that cause participants to adjust their expectations.

Question 7

Suppose 3M pays a dividend of $2 per share which the investor is expected to receive immediately.The dividend is expected to grow by 5% per year and the investor has a required rate of return of 8%.What should be the current price of the stock according to the Gordon-Growth model?

Accepted Answer

The answer of Suppose 3M pays a dividend of $2...

Question 8

Explain what is meant by the "double taxation of dividends"?

Accepted Answer

The answer of Explain what is meant by the "double...

Question 9

According to the Gordon-Growth model,what will be the percentage change in the value of a stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% but now are expected to grow by 4% per year?

Accepted Answer

According to the Gordon-Growth model, the value of a stock is calculated using the formula V = D/(r-g), where V is the stock's value, D is the current dividend, r is the required rate of return, and g is the expected growth rate of dividends. If the current dividend is $10.00 and the expected growth rate of dividends has changed from 3% to 4%, we can calculate the percentage change in the stock's value as follows:

Old value = $10.00/(r-0.03)
New value = $10.00/(r-0.04)

Dividing the new value by the old value and subtracting 1 gives:

(New value/Old value)-1 = [(r-0.03)/(r-0.04))-1] = 0.178

Multiplying by 100 gives a percentage change of 17.8%, which is closest to answer choice B.

Question 10

George is trying to forecast the future price of IBM's common stock.To do so he makes use only of past prices of IBM stock.George

Accepted Answer

By using only past prices to forecast future prices, George is demonstrating adaptive expectations, which assumes that future prices will follow past trends and patterns. This approach does not account for changes in IBM's underlying fundamentals or market conditions, and may not respond quickly to new information or events that affect the stock price.

Question 11

If market participants rely only past stock prices to forecast future stock prices,

Accepted Answer

Relying only on past stock prices to forecast future prices is a form of adaptive expectations, where investors adjust their expectations based on previous outcomes. This approach does not take into account any external factors or fundamental analysis, and therefore cannot accurately predict future price increases or decreases, as future events may play a significant role in the stock's performance.

Question 12

The double taxation of dividends typically refers to

Accepted Answer

The double taxation of dividends refers to dividends being taxed first as corporate profits and then as income after being paid to stockholders.

Question 13

According to the Gordon-Growth model,which of the following can cause the value of a stock to decline?

Accepted Answer

Increased systemic risk can cause the required return on equity to increase, which would decrease the value of the stock according to the Gordon-Growth model. Higher expected growth rate of dividends or an increase in the current dividend would increase the value of the stock, and a decreased required return on equity would also increase the value of the stock.

Question 14

Suppose you are considering buying shares of a stock to hold for one year.The stock has an expected annual dividend of $2 and an expected price at the end of the year of $25.If your required rate of return is 10%,what is the most that you should be willing to pay for the stock? Round off to the nearest cent.

Accepted Answer

The answer of Suppose you are considering buying shares of...

Question 15

Why do some economists think that taxing capital gains results in a locked-in effect?

Accepted Answer

The answer of Why do some economists think that taxing...

Question 16

If you buy 100 shares of 3M at $86 a share and sell all shares one year later for $99 a share.During the year,you earned a dividend of $2.10 a share.What was your rate of return? Report your answer in percentages with one decimal point.

Accepted Answer

The answer of If you buy 100 shares of 3M...

Question 17

When market participants have rational expectations,

Accepted Answer

Rational expectations theory assumes that market participants use all information available to them to make rational predictions of future outcomes. This means they incorporate all available information into their expectation formation process, resulting in more accurate forecasts than with other forms of expectations, such as adaptive expectations.

Question 18

According to the Gordon-Growth model,if the stock price is $21,required return on equity is 10% and the current dividend is $1,what is the expected growth rate of dividends?

Accepted Answer

According to the Gordon-Growth model, the formula is: 
Stock price = (Expected dividend / (required return on equity - expected growth rate))
$21 = ($1 / (0.10 - g))
$21(0.10 - g) = $1
$2.1 - $21g = $1
$1.1 = $21g
g = 1.1/21 = 0.052 or 5.2%
Therefore, the expected growth rate of dividends is 5%, which is option B.

Question 19

Which of the following expressions gives the present value of future dividends for a company whose current dividend is $5.00 and whose future dividends are expected to grow at rate g?

Accepted Answer

The correct expression for the present value of future dividends, assuming a current dividend of $5.00 and a growth rate of g, is given by the formula [$5.00(1 + g)]/(i - g), where i is the discount rate. This formula accounts for the initial dividend growing at a rate of g and is discounted back at the rate i.

Question 20

When market participants have rational expectations,

Accepted Answer

When market participants have rational expectations, they use not only past experiences but also their expectations for the future to form their expectations. This means that their expectations for future events are based on their interpretation of both historical information and their understanding of current economic conditions. However, it does not mean that their forecasts are always correct, as they may still be subject to unexpected events and uncertainties.

Quiz 6: The Stock Market, information, and Financial Market Efficiency

When market participants have adaptive expectations

According to the Gordon-Growth model,what will be the percentage change in the value of the stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% per year but now are expected to grow by 1% per year?

What are the effects of the double taxation of dividends?

Suppose you buy a stock that sells for $20.It's expected annual dividend is $2 and you expect its price to be $25 in one year.What is your expected rate of return on the stock?

According to the Gordon-Growth model,an increase in the required return on equity

Expectations of asset values by participants in financial markets

Suppose 3M pays a dividend of $2 per share which the investor is expected to receive immediately.The dividend is expected to grow by 5% per year and the investor has a required rate of return of 8%.What should be the current price of the stock according to the Gordon-Growth model?

Explain what is meant by the "double taxation of dividends"?

According to the Gordon-Growth model,what will be the percentage change in the value of a stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% but now are expected to grow by 4% per year?

George is trying to forecast the future price of IBM's common stock.To do so he makes use only of past prices of IBM stock.George

If market participants rely only past stock prices to forecast future stock prices,

The double taxation of dividends typically refers to

According to the Gordon-Growth model,which of the following can cause the value of a stock to decline?

Why do some economists think that taxing capital gains results in a locked-in effect?

If you buy 100 shares of 3M at $86 a share and sell all shares one year later for $99 a share.During the year,you earned a dividend of $2.10 a share.What was your rate of return? Report your answer in percentages with one decimal point.

When market participants have rational expectations,

According to the Gordon-Growth model,if the stock price is $21,required return on equity is 10% and the current dividend is $1,what is the expected growth rate of dividends?

Which of the following expressions gives the present value of future dividends for a company whose current dividend is $5.00 and whose future dividends are expected to grow at rate g?

When market participants have rational expectations,