See Figure 17.6 Below

question 42

Essay

See Figure 17.6 below.
Also, as begins to fall, it becomes a self-fulfilling prophecy and investment falls too.
Figure 17.6: I/Y Ratio and the FFR (Source: Federal Reserve Economic Data, St. Louis Federal Reserve)
-Write down the equation for the stock price. Use this equation to answer the following:
(a) Your stockbroker calls to tell you she has a great deal on a stock. She gives you the
following information: the real interest rate is 4 percent, the capital gain on this stock is 3.5
percent, and it pays $2.50 in dividends. How much should you pay for this stock?
(b) The next day she calls back and tells you about another stock that is for sale (i.e., the
market price) for $75. She does not know the dividend growth but she does know the
dividend payment, $0.35 per share, and the real interest rate, 4 percent. For you to buy
this stock, how much annual dividend growth should you expect at that price?
(c) A hot stock tip comes from a friend. The price of the stock is $50, the dividend gain is 2.5
percent, and you know the real interest rate from your previous two discussions with your
broker. How much of a dividend payment will you want?

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