The __________, often used in financial economics, is a method of valuing a company's stock by using predicted dividends and discounting them back to present value. The idea is that the value of a stock is the present value of all future dividends it is expected to provide. A) Dividend Discount Model B) Capital Asset Pricing Model C) Efficient Market Hypothesis D) Arbitrage Pricing Theory

11. Graphically derive the LM curve from the money market equilibrium when the money supply is exogenously determined by the central bank and remain constant. That is, drive the positive relation between the interest rate and income. 12. Derive LM relation and graphically show it under the alternative assumption that the central bank sets a target interest rate (and adjusts the money supply so as to achieve it). In this case, LM relation would represent the combination of interest rate and output arising from an interest rate rule.

b)    Adagio Corporation has return on equity (ROE) of 20% and its plowback ratio is p.  The ROE and the plowback ratio are expected to stay the same in all future periods.  The company's earnings are expected to be £4 per share next year.  The cost of capital is 15%.  What is the present value of growth opportunities of this corporation as a function of p?  Calculate the present value of its growth opportunities for p = 30%.

Suppose the world can be described in two states, and two stocks are available with future per share prices: State X Y 1 $10 $15 2 $20 $11 The current prices for stock X and Y are $13 and $10, respectively. a) Suppose now you have saved $3900 to invest in stocks (X and Y), what is your investment strategy to maximize your total wealth when the future is in State 1? b) Based on a), what is your investment strategy if you want to keep your future wealth as smooth as possible between the two States?

Although its application continues to spark vigorous debate, modern financial theory is now applied as a matter of course to investment management. CAPM, the capital asset pricing model, is a theoretical representation of the behavior of financial markets and can be employed in estimating a company’s cost of equity capital. Despite limitations, the model can be a useful addition to the financial manager’s analytical tool kit. The expanding work on the theory and application of CAPM has produced many sophisticated, often highly complex extensions of the simple model. Discuss the assumptions that the modern financial theory and CAPM rest on. Discuss whether assumptions that they depend on are realistic or unrealistic. Discuss how the concept of risk is defined or calculated in financial theory and CAPM.

The following data show the closing stock price of MNM Corporation for the last seven trading days. Please answer the following questions. Table 1 Day Stock Price 1 84 2 87 3 84 4 88 5 85 6 90 7 91   Range = ______________.  Mean = ______________.  Variance = ____________.  Standard deviation = _________. (Round off your answer at 2 decimal places.) Coefficient of variation = ___________%. (Round off your answer at 2 decimal places.)

A firm goes to the markets to raise capital. The investor can either invest V₁ on the firm or buy government bonds. If she invests, the expected value of the dividend she receives the following period is Et[Dt+1]. Where Et[] denotes the mathematical expectation, taken at time, t. If she buys a government bond, and receive a gross return (1 + r) for sure. 1. Let Et [Vt+1] denote the expected value of the stock the following period, explain why this is not the only return that the investor can expect from owning the stock. 2. Write down an expression for the gross return on the stock. [Hint: This is a ratio.] 3. Suppose investor's objective is to maximize their expected return. If the return from bonds is higher than the expected return from stocks, will they buy stocks or bonds? How about the other way around? 4. Since investors hold both stocks and bonds, what must be true about the expected return of stocks and bonds in equilibrium? Show that this implies the following no arbitrage…

U and L are two firms with the same EBIT of $100,000. They are identical in every respect except firm L has a debt of $500,000 at 5% rate of interest. The cost of equity of firm U is 8% and that of firm L is 12%. Assume that arbitrage principle will be applied in this setting and it is possible to make an arbitrage profit (surplus). Also, all earnings streams are perpetuities, taxes are ignored and both firms distribute all earnings available to common stockholders. Assume that an investor has 20% of shares (equity) of the firm L and MM assumptions hold. That is, you will be able to borrow or lend at the same rate as the firms can (5%). How much would the arbitrage profit (surplus) be for that investor who owns 20% of equity of the firm L and plans to create that arbitrage by switching to firm U? (Do not use the $ sign in your answer. If your answer is $12,345.67, then enter 12345.67 )

In the special case when asset returns are independently identically distributed (IID) through time, how is the dynamic problem different from the buy-and-hold problem over the entire investment horizon?