A Stock Generates a Perpetual Cash Flow of $8 Per

question 16

Multiple Choice

A stock generates a perpetual cash flow of $8 per share, per year. The market index has an expected return of 14% and the risk free rate is 3%. If the stock's listed beta is 1.0 and I believe the true beta is 1.3, how much is the stock overpriced?

• A) $33.42
• B) $25.78
• C) $18.20
• D) $10.90

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Definitions:

Dominant Strategy

In game theory, a strategy that is best for a player in a game regardless of the strategies chosen by the other players.

Game Trees

A graphical representation used to depict the outcomes of a game or decision-making process, showing different choices and their possible outcomes.

Sequential Games

are strategic interactions where the players make decisions one after another, with later players having knowledge of the earlier actions.

Nash Equilibrium

A concept in game theory where each player's strategy is optimal, given the strategies of other players, resulting in a situation where no player has an incentive to deviate from their chosen strategy.