10) Both Company A and Company B have the same current dividend per share, but C

Question

10) Both Company A and Company B have the same current dividend per share, but Company A's dividend is expected to grow at 2.5% per year while Company B's is expected to grow at 2.25% per year. All other things being equal, Company B will have the higher current share price. True False 11) If weuse the yield on U.S. Treasury Inflation Protected Securities (CTIPS) as our measure of the risk-free ( real interest rate, an increase in the yield of those bonds will cause the price of stocks to fall. True False 12) A "flight to quality" in the bond market will be associated with a decrease in stock (1pts) prices. OTrue OFalse (1pts) Municipal bonds will be more attractive to investors who are in lower tax brackets 13) OTrue False

Explanation / Answer

The answer is False. Since the dividend for A is expected to grow higher than B, using the Dividend growth model of price determination, it can be said that price of A will be greater than the price of B. The answer is False. An increase in the yield of TIPS will lead to the rise of the price of a stock. This can be proved using the CAPM model. The answer is True. In case an investor takes "flight to quality", he or she moves away from the risky investments. This results in a sale of high-risk securities and stocks, thus bringing down the prices of the stocks. The answer is true. Municipal bonds are secure investments as compared to other instruments. Hence, people in the lower tax bracket (who also have low income) will want to invest in safer investment instruments.

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