17) Today\'s futures markets are dominated by trading in _______ contracts. a. m
ID: 2765655 • Letter: 1
Question
17) Today's futures markets are dominated by trading in _______ contracts.
a. metals b. agriculture c. commodity d. financial
22) The stock of Nogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $3. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 30% rate of return per year. This situation is expected to continue indefinitely.
Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nogro’s investors require? (Do not round intermediate calculations.)
By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?
Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nogro’s investors require? (Do not round intermediate calculations.)
Explanation / Answer
Answer to Question no 17.
c. Commodity
Answer to Question no 22.
a. ) D1=0.5*$3=$1.5
G=b*ROE
=0.5*0.30
=0.15
Therefore,
k= (D1/P0) +g
=$1.5/$10+0.15
=0.30
=30.0%
b.) Since K=ROE, the NPV of future investment opportunities is zero:
PVGO=P0-(E0/k)
=$10-$10
=$0
C-1.) Since k = ROE, the stock price would be unaffected if Nogro were to cut its dividend payout ratio to 25%. The additional earnings that would be reinvested would earn the ROE (30%).
C-2) If Nogro eliminated the dividend, this would have no impact on Nogro’s stock price since the NPV of the additional investments would be zero
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