Questions
12.8 a. What is the efficient markets hypothesis
(EMH)?
b. What are its implications for investors and managers?
Problems
12.2 Medical Corporation of America (MCA) has a
current stock price of
$36, and its last dividend (D0) was $2.40. In view of MCA’s
strong financial position, its required rate of return is 12 percent. If MCA’s
dividends are expected to grow at a constant rate in the future, what is the
firm’s expected stock price in five years.
12.4 Assume the risk-free rate is 6 percent and the
market risk premium is 6 percent. The stock of Physicians Care Network (PCN)
has a beta of 1.5. The last dividend paid by PCN (D0) was $2 per share.
a. What would PCN’s stock value be if the dividend were
expected to grow at a constant:
• -5 percent?
• 0 percent?
• 5 percent?
• 10 percent?
b. What would be the stock value if the growth rate were 10
percent but PCN’s beta fell to:
• 1.0?
• 0.5?
