Random #6 Flashcards
Dividend Growth for next years dividend
Current dividend * 1 + Growth rate
What is stock worth if you know the expected dividend growth for next year?
Gordon Growth Model
simple formula for valuing a stock based on future dividends after adjusting for the cost of capital
2 ways to calcuate required rate of return RRR?
the dividend discount model (DDM), or the capital asset pricing model (CAPM
Formula for RRR using discount dividend model
Current dividend/Current price + expected growth rate
Capital Asset Pricing Model
Risk Free Rate + Beta * (expected return of the market - RFR of return)
CAPM Example: a stock valued at $100 per share today that pays a 3% annual dividend. The stock has a beta compared with the market of 1.3, which means it is more volatile than a broad market portfolio (i.e., the S&P 500 index). Also, assume that the risk-free rate is 3% and this investor expects the market to rise in value by 8% per year. What is the expected rate of return?
The expected return of the stock based on the CAPM formula is 9.5%:
9.5%=3%+1.3×(8%−3%)
Fed actions during high inflation?
Contract the money supply by lowering government spending and increasing taxes. Therefore, the answer is to decrease the money supply and increase taxes.
Fed actions during a recession
Reduce the fed funds rate to spur spending, decrease the reserve ratio so banks can lend more, lower the discount rate so banks can borrow more
Calculate after tax yield- how much will the investor keep if tax rate is 6% in a state where he pays taxes
100%-6% = 94%; the investor will get 94% of the return on a muni, i.e.
Are muni’s tax free federally?
Yes, but you will pay state taxes
Are federal bonds tax free federally
No, but you will not pay state taxes
calculate current yield on a stock
annual dividends/current market price = yield
calculate current yield on a bond
interest/ current market price = yield
What is the formula for investor’s yield?
Yield (interest or dividends) divided by current market price
