Tangshan China's Stock Is Currently Selling for $160

question 147

Essay

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely.In addition,Tangshan China's most recent dividend was $5.50.The expected risk free rate of return is 3 percent,the expected market return is 8 percent,and Tangshan has a beta of 1.20.
(a)Based on the dividend valuation model,what return do investors expect to earn in the future?
(b)What is the expected return based on the CAPM?
(c)Would Tangshan China be a good investment at this time? Explain

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Definitions:

Hindsight Bias

The tendency to believe, after an event has occurred, that one would have predicted or expected the outcome, often referred to as the "I-knew-it-all-along" effect.

Overconfidence

A cognitive bias where an individual's subjective confidence in their judgments is reliably higher than their objective accuracy, leading to potential errors in decision making.

Hindsight Bias

The predisposition to think, once an event has taken place, that one could have predicted or anticipated its outcome.

Intuition

An effortless, immediate, automatic feeling or thought, as contrasted with explicit, conscious reasoning.