Question 2. (a) Two investors are evaluating Nelsom’s stock for possible purchas

Question

Question 2.     

(a) Two investors are evaluating Nelsom’s stock for possible purchase. They agree on the expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the risk of the stock. However, one investor normally holds stocks for 3 years and the other normally holds stocks for 8 years. Should both be willing to pay the same price for Nelsom’s stock? True or false? Explain

(b) A stock is trading at $100 per share. The stock is expected to have a year-end dividend of $8 per share (D1 = $8), and it is expected to grow at some constant rate g throughout time. The stock’s required rate of return is 15%. If markets are efficient, what is your forecast of g?   

Explanation / Answer

a) False

If rate of risk is lower than rate of return than they earn a profit which PV is Differ Yearwise Cause of Different in rate of return and rate of risk than Both Invester not ready to Pay Same price cause of PV of they take a risk One For 3 Years and Other for 8 Years

However if rate of return and rate of risk is equal than both agree for Same Price.

b) Required Growth Rate G = Expected Return - Dividend at end of the Year (%)

= 15 % - (8/100)%

= 15% - 8%

= 7% Forcast of g

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