{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}


One category of nonconstant growth stock is a

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ant rate forever. One category of nonconstant growth stock is a ³supernormal´ growth stock which has one or more years of growth above that of the economy as a whole, but at some point the growth rate will fall to the ³normal´ rate. This occurs, generally, as part of a firm¶s normal life cycle. A zero growth stock has constant earnings and dividends; thus, the expected dividend payment is fixed, just as a bond¶s coupon payment. Since the company is presumed to continue operations indefinitely, the dividend stream is a perpetuity. A perpetuity is a security on which the principal never has to be repaid. Answers and Solutions: 7 - 2 h. Equilibrium is the condition under which the expected return on a security is just › equal to its required return, r = r, and the price is stable. The Efficient Markets Hypothesis (EMH) states (1) that stocks are always in equilibrium and (2) that it is impossible for an investor to consistently ³beat the market.´ In essence, the theory holds that the price of a stock will adjust almost immediately in response to any new developments. In other words, the EMH assumes that all important information regarding a stock is reflected in the price of that stock. Financial theorists generally define three forms of market efficiency: weak-form, semistrong-form, and strongform. Weak-form efficiency assumes that all information contained in past price movements is fully reflected in current market prices. Thus, information about recent trends in a stock¶s price is of no use in selecting a stock. Semistrong-form efficiency states that current market prices reflect all publicly available information. Therefore, the only way to gain abnormal returns on a stock is to possess inside information about the company¶s stock. Strong-form efficiency assumes that all information pertaining to a stock, whether public or inside information, is reflected in current market prices. Thus, no investors would be able to earn abnormal returns in the stock market. i. Preferred stock is a hybrid--it is similar to bonds in some respects and...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online