Cache Creek Manufacturing Company Is Expected to Pay a Dividend

question 1

Multiple Choice

Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalisation rate, and the constant growth DDM to determine the value of the shares. The share is currently priced at $84.00. Using the constant growth DDM, the market capitalisation rate is ________.

• A)9%
• B)12%
• C)14%
• D)18%

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Definitions:

Neoclassical Economic Model

An economic theory that focuses on how the equilibrium state of markets is reached through supply and demand forces, emphasizing utility maximization and profit maximization.

Behavioral Economics

A field of economics that studies the effects of psychological, cognitive, emotional, cultural, and social factors on the economic decisions of individuals and institutions.

Overconfidence Effect

The bias where an individual's subjective confidence in their judgments is greater than their objective accuracy.

Cognitive Bias

A cognitive bias is a systematic pattern of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion.