Solutions to chapter 11

Solutions to - Chapter 11 The Stock Market Investing in Stocks Common Stock Versus Preferred Stock How Stocks are Sold Computing the Price of a

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Chapter 11 The Stock Market Investing in Stocks Common Stock Versus Preferred Stock How Stocks are Sold Computing the Price of a Common Stock The One-Period Valuation The Generalized Dividend Model The Gordon Growth Model Price Earnings Valuation Method How the Market Sets Security Prices Errors in Valuation Problems with Estimating Growth Problems with Estimating Risk Problems with Forecasting Dividends
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58 Mishkin/Eakins • Financial Markets and Institutions, Sixth Edition ± Answers to End-of-Chapter Questions
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Chapter 11 The Stock Market 59 1. The value of any asset is the present value of its future cash flows. The value of a bond is the PV of the interests payments plus the PV of the final payment. Stocks are valued the same way. The price is the PV of the cash flows that stock is expected to generate for the investor. 2. There are two cash flows from stock, periodic dividends, and a future sales price. Dividends are frequently changed when firm earnings either rise or fall. The future sales price is also difficult to estimate, since it depends on the dividends that will be paid at some date even farther in the future. Bond cash flows also consist of two parts, periodic interest payments and a final maturity payment. These payments are established in writing at the time the bonds are issued and cannot be changed without the firm defaulting and being subject to bankruptcy. Stock prices tend to be more volatile, since their cash flows are more subject to change.
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This note was uploaded on 10/12/2011 for the course BIEMF 30006 taught by Professor Ippolito during the Fall '10 term at Università Bocconi.

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Solutions to - Chapter 11 The Stock Market Investing in Stocks Common Stock Versus Preferred Stock How Stocks are Sold Computing the Price of a

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