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Unformatted text preview: Economics 252 Problem Set #4 1. If the dividend stream of a company is a random walk, D t = D t-1 + u t where u t is random forecastable noise which is always revealed on the dividend date and if the price of a share of the stock is the present value with constant discount rate of the expected future dividends, is the price of a share a random walk too? Explain. 2. If the dividend per share D t = D e gt + u t where u t is random forecastable noise which is always revealed on the dividend date, and g is the growth rate of dividends, is the price of a share of the stock still a random walk? Explain. 3. The basic efficient markets model says that price per share is the present value of expected future dividends per share. Is this efficient markets model then inconsistent with the Modigliani-Miller theory that dividend policy is irrelevant to firm value? In answering this question, consider the case of a firm that is retaining half its earnings (which are at level $10 per share at time 0) to invest in factories and...
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- Spring '08