Questions 12.8 a. What is the efficient markets hypothesis (EMH)?  b. What are its implications for

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?