Stock XYZ is priced today (at t=0) using the CAPM and the fundamentals given below, which are common knowledge: Next year dividend per share (D1) = $12, growth=0%, Rf = 3%, beta=1.5, (Rm-Rf)=6%. Suppose tomorrow (at t=1), the management learns that the growth rate will in fact be 2% instead of the 0% previously expected. Everything else stays the same, including the dividends next year which is still expected to be $12. This higher growth rate is not common knowledge yet; only the management knows it. Two days later (at t=2), the news of the higher growth rate are formally disclosed to the public through a press release.
(a) Find the market price today.
(b) Find the market price tomorrow assuming markets are, alternatively, strongly-efficient and semi-strongly-efficient.
(c) Find the market price two days later assuming markets are, alternatively, strongly-efficient and semi-strongly-efficient.
(d) Assume that markets are behavioral and tend to underreact to information such as release of growth rate forecast. Suppose the underreaction lasts for 3 months. Plot and explain the stock-price response to the news release. What can you say about the XYZ’s stock return during the three months after the public announcement?
(e) Suppose that we don’t know whether the markets are efficient or not; describe how you can test market efficiency in this situation.
2007-12-01
05:11:37
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2 answers
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asked by
hare_rene
1
in
Business & Finance
➔ Investing