The price of imported oil fell dramatically in late 2008. What sort of macroeconomic shock would this be considered?
The supply shock
Any unexpected event that has a large scale ramification on the economy is known as a shock or macroeconomic shock. Broadly there are two types of such shocks – Supply shock and demand shock.
Since the prices fell largely owing to supply hence this would fall under the category of supply shock.
The stock of Nogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $2. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20% rate of return per year. This situation is expected to continue indefinitely.
a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nogro’s investors require?
b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?
c. If Nogro were to cut its dividend payout ratio to 25%, what would happen to its stock price? What if Nogro eliminated the dividend?
The risk-free rate of return is 8%, the expected rate of return on the market portfolio is 15%, and the stock of Xyrong Corporation has a beta coefficient of 1.2. Xyrong pays out 40% of its earnings in dividends, and the latest earnings announced were $10 per share.
Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 20% per year on all reinvested earnings forever.
a. What is the intrinsic value of a share of Xyrong stock?
b. If the market price of a share is currently $100, and you expect the market price to be equal to the intrinsic value one year from now, what is your expected one-year holding-period return on Xyrong stock?
Here are four industries and four forecasts for the macro-economy. Choose the industry that you would expect to perform best in each scenario.
Industries: housing construction, health care, gold mining, steel production.
Deep recession: falling inflation, falling interest rates, falling GDP.
Superheated economy: rapidly rising GDP, increasing inflation and interest rates.
Healthy expansion: rising GDP, mild inflation, low unemployment.
Stagflation: falling GDP, high inflation.
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