A 1. Discuss current options for major U.S. oil companies in today\'s environmen
ID: 2743609 • Letter: A
Question
A
1. Discuss current options for major U.S. oil companies in today's environment. (see section 9.4 in the text for various choices). What would you recommend?
2. For the past 200 years, the average return for U.S. stocks (discounting inflation) is 6-8%. Why?
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B
1. Which method do you prefer for finding the intrinsic vale of a stock; the dividend discount method or the CAPM? WHY?
2. Is the U.S. stock market efficient? Also, discuss the behavior challenge to market efficiency:
Explanation / Answer
B) Question 2) Is the US stock market efficient ?
Answer:- Yes, The US stock market is efficient.
Explanation:- The basic premise of Efficient Market Theory is that market participants receive and act on all the relevant information as soon as it becomes available in the stock market. In other words, Prices of securities reflect not only all the information found in the record of past prices and volumes but also all other publicly available information. U.S. stock market is efficient one as the prices of company's stock there reflects all kind of information like information regarding the company, the technology used in company, other reliable information regrading the company's stock which is available publicly in the market. Further, trading of securities in U.S. is also not very expensive. Thus, U.S. Stock Market is efficient form of market.
Conclusion:- The US stock market is efficient.
B) Question 1)
Answer:- For finding the intrinsic value of a stock, Dividend Discount Model should be preferred over the Capital Asset Pricing Method (CAPM) method.
Explanation:- Dividend Discount Model calculates the intrinsic value of a stock using the following formula:-
Value of Stock = D1 / Ke - G
Where D1 = Expected future dividend per share, Ke = Cost of equity capital / Expected rate of return and G = annual growth rate of dividend.
Dividend Discount Method relates the value of company's stock to the dividend policy of the company. The relationship between dividend and value of company's stock is shown/reflected in the formula mentioned above. According to Dividend Discount model, Dividends are very relevant in valuing the company's stock.
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