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Unformatted text preview: MIT Sloan School of Management J. Wang 15.407 E52-456 Fall 2003 Problem Set 3: Common Stock Due: October 10, 2003 1. (BKM) Which of the following assumptions are(is) necessary to the constant-growth dividend discount model? Briefly explain. (a) Dividens grow at a constant rate (b) The dividend growth rate continues indefinitely (c) The required rate of return is higher than the dividend growth rate. 2. Explain the following: (a) When will the DDM model not able to assign a positive/finite value to a company? Explain why that may or may not be a problem when valuing a company. (b) Typically, what types of company will have a high P/E ratio, and what types will have a high Book-to-Market ratio? Does that mean that companies of high P/E or B-M ratio are overvalued or undervalued? 3. (BM) In March 1995, International Papers stock sold for about $73. Security analysts were forecasting a long-term earnings growth rate of 8.5%. The company was paying dividends of $1.68 per share....
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- Fall '03