Chapter 9 Homework Answers

Chapter 9 Homework Answers - General Electric and the...

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CHAPTER 9 COMMON STOCKS AND PREFERRED STOCKS SOLUTIONS TO PROBLEMS: 3. g = .07 (or 7% ) 5. P 0 = $12.50 8. P 0 = $27.00 Since the quoted price of $28.00 is greater than the computed value of the stock, Lavonne should not buy Piedmont stock. 17. a. Required rate of return for Tucker from SML: k e = 12% Expected return for Tucker from the constant growth model: k e = 13% b. The equilibrium price using the SML required rate of return and the constant growth model is: P 0 = $44.44 18. a. P 0 = $20.67 b. Any of several reasons may account for the difference in the calculated price for
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Unformatted text preview: General Electric and the observed trading price for the stock. Its possible that the model used to determine the price may be incorrect, i.e., the constant growth model may not be appropriate. Its also possible that the inputs into the model may be incorrect, for example, General Electrics beta may be lower than 0.91 or the market return used may be incorrect. Finally, its possible that the model may be correct but the market may be inefficient and has overvalued the stock. 64...
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