国际金融(英文版第二版)Chapter 9 The International Monetary System

Chapter 9—Forecasting Exchange Rates1. Which of the following forecasting techniques would best represent the use of today's forwardexchange rate to forecast the future exchange rate?a. fundamental forecasting.b. market-based forecasting.c. technical forecasting.d. mixed forecasting.ANS: B PTS: 12. Which of the following forecasting techniques would best represent sole use of today's spot exchangerate of the euro to forecast the euro's future exchange rate?a. fundamental forecasting.b. market-based forecasting.c. technical forecasting.d. mixed forecasting.ANS: B PTS: 13. Which of the following forecasting techniques would best represent the use of relationships betweeneconomic factors and exchange rate movements to forecast the future exchange rate?a. fundamental forecasting.b. market-based forecasting.c. technical forecasting.d. mixed forecasting.ANS: A PTS: 14. Which of the following forecasting techniques would best represent the sole use of the pattern ofhistorical currency values of the euro to predict the euro's future currency value?a. fundamental forecasting.b. market-based forecasting.c. technical forecasting.d. mixed forecasting.ANS: C PTS: 15. If a particular currency is consistently declining substantially over time, then a market-based forecastwill usually have:a. underestimated the future exchange rates over time.b. overestimated the future exchange rates over time.c. forecasted future exchange rates accurately.d. forecasted future exchange rates inaccurately but without any bias toward consistentunderestimating or overestimating.ANS: B PTS: 16. According to the text, the analysis of currencies forecasted with use of the forward rate suggests that:a. currencies exhibited about the same mean forecast errors as a percent of the realized value.b. the Canadian dollar can be forecasted by U.S. firms with greater accuracy than othercurrencies.c. the Swiss franc can be forecasted by U.S. firms with greater accuracy than othercurrencies.d. none of the aboveANS: B PTS: 17. Assume the following information:Predicted Value of Realized Value ofPeriod New Zealand Dollar New Zealand Dollar1 $.52 $.502 .54 .603 .44 .404 .51 .50Given this information, the mean absolute forecast error as a percentage of the realized value is about:a. 1.5%.b. 26%.c. 6%.d. 6.5%.e. none of the aboveANS: DSOLUTION: [|$.52 - $.50|/$.50 + |$.54 - $.60|/$.60 + |$.44 - $.40|/$.40 + |$.51 -$.50|/$.50)]/4= [.04 + .10 + .10 + .02]/4= .065 = 6.50%PTS: 18. If it was determined that the movement of exchange rates was not related to previous exchange ratevalues, this implies that a ____ is not valuable for speculating on expected exchange rate movements.a. technical forecast techniqueb. fundamental forecast techniquec. all of the aboved. none of the aboveANS: A PTS: 19. Which of the following is true?a. Forecast errors cannot be negative.b. Forecast errors are negative when the forecasted rate exceeds the realized rate.c. Absolute forecast errors are negative when the forecasted rate exceeds the realized rate.d. None of the above.ANS: D PTS: 110. Which of the following is true according to the text?a. Forecasts in recent years have been very accurate.b. Use of the absolute forecast error as a percent of the realized value is a good measure touse in detecting a forecast bias.c. Forecasting errors are smaller when focused on longer term periods.d. None of the above.ANS: D PTS: 111. A fundamental forecast that uses multiple values of the influential factors is an example of:a. sensitivity analysis.b. discriminant analysis.c. technical analysis.d. factor analysis.ANS: A PTS: 112. When the value from the prior period of an influential factor affects the forecast in the future period,this is an example of a(n):a. lagged input.b. instantaneous input.c. simultaneous input.d. B and CANS: A PTS: 113. Assume a forecasting model uses inflation differentials and interest rate differentials to forecast theexchange rate. Assume the regression coefficient of the interest rate differential variable is -.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?a. The interest rate variable is inversely related to the exchange rate, and the inflationvariable is directly (positively) related to the interest rate variable.b. The interest rate variable is inversely related to the exchange rate, and the inflationvariable is directly related to the exchange rate.c. The interest rate variable is directly related to the exchange rate, and the inflation variableis directly related to the exchange rate.d. The interest rate variable is directly related to the exchange rate, and the inflation variableis directly related to the interest rate variable.ANS: B PTS: 114. Which of the following is not a limitation of fundamental forecasting?a. uncertain timing of impact.b. forecasts are needed for factors that have a lagged impact.c. omission of other relevant factors from the model.d. possible change in sensitivity of the forecasted variable to each factor over time.e. none of the aboveANS: B PTS: 115. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and theMexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is used as a forecast?a. $.131.b. $.226.c. $.262.d. $.140.e. $.174.ANS: ESOLUTION: (1.05)5/(1.08)5- 1 = -13%; $.20[1 + (-13%)] = $.174PTS: 116. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollarcontains a 6% discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:a. $.860.b. $.848.c. $.740.d. $.752.e. none of the aboveANS: DSOLUTION: $.80 ⨯ [1 + (-6%)] = $.752PTS: 117. If today's exchange rate reflects all relevant public information about the euro's exchange rate, but notall relevant private information, then ____ would be refuted.a. weak-form efficiencyb. semistrong-form efficiencyc. strong-form efficiencyd. A and Be. B and CANS: D PTS: 118. According to the text, research generally supports ____ in foreign exchange markets.a. weak-form efficiencyb. semistrong-form efficiencyc. strong-form efficiencyd. A and Be. B and CANS: D PTS: 119. Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent.Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:a. depreciation in the Australian dollar's value over the next year.b. appreciation in the Australian dollar's value over the next year.c. no change in the Australian dollar's value over the next year.d. information on future interest rates is needed to answer this question.ANS: A PTS: 120. If the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rateparity holds, then:a. covered interest arbitrage is feasible.b. the international Fisher effect (IFE) is supported.c. the international Fisher effect (IFE) is refuted.d. the average absolute error from forecasting would equal zero.ANS: B PTS: 121. Which of the following is not a forecasting technique mentioned in your text?a. accounting-based forecasting.b. technical forecasting.c. fundamental forecasting.d. market-based forecasting.ANS: A PTS: 122. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):MYR t = a0 + a1INC t- 1 + a2INF t- 1 + μt,where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a0 = .005; a1 = .4; and a2 = .7. The most recent quarterly percentage change in the inflation differential is -5%, while the most recent quarterlypercentage change in the income differential is 3%. Using this information, the forecast for thepercentage change in the ringgit is:a. 4.60%.b. -1.80%.c. 5.2%.d. -4.60%.e. none of the aboveANS: BSOLUTION: MYR t = .005 + (.4)(.03) + (.7)(-.05) = -1.80%PTS: 123. The following regression model was estimated to forecast the value of the Indian rupee (INR):INR t = a0 + a1INT t + a2INF t- 1 + μt,where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the U.S. and India, and INF is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of a0 = .003; a1 = -.5; and a2 = .8. Assume that INF t - 1 = 2%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:Probability Possible Outcome30% -2%40% -3%30% -4%The expected change in the Indian rupee in period t is:a. 3.40%.b. 0.40%.c. 3.10%.d. 1.70%.e. none of the aboveANS: ASOLUTION: E[INT t] = (-.02)(.3) + (-.03)(.4) + (-.04)(.3) = -3.00%INR t = .003 + (-.5)(-.03) + (.8)(.02) = 3.40%PTS: 124. Huge Corporation has just initiated a market-based forecast system using the forward rate as anestimate of the future spot rate of the Japanese yen (¥) and the Australian dollar (A$). Listed below are the forecasted and realized values for the last period:Currency Forecasted Value Realized ValueAustralian dollar $.60 $.55Japanese yen $.0067 $.0069According to this information and using the absolute forecast error as a percentage of the realized value, the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar.a. more accurate thanb. less accurate thanc. more biased thand. the same asANS: ASOLUTION: Absolute forecast error for the Australian dollar = (|.60 - .55|)/.55 = 9.09%Absolute forecast error for the Japanese yen = (|.0067 - .0069|)/.0069 =2.90%Therefore, Huge Corp. has estimated the Japanese yen more accurately byapproximately 6.19%.PTS: 125. Gamma Corporation has incurred large losses over the last ten years due to exchange rate fluctuationsof the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts to be biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased:S t = a0 + a1F t -1 + μt,where S t is the spot rate of the pound in year t and F t- 1 is the forward rate of the pound in year t -1.Regression results reveal coefficients of a0 = 0 and a1 = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.a. overestimatedb. underestimatedc. correctly estimatedd. none of the aboveANS: B PTS: 126. Which of the following is not a method of forecasting exchange rate volatility?a. using the absolute forecast error as a percentage of the realized value.b. using the volatility of historical exchange rate movements as a forecast for the future.c. using a time series of volatility patterns in previous periods.d. deriving the exchange rate's implied standard deviation from the currency option pricingmodel.ANS: A PTS: 127. If a foreign currency is expected to ____ substantially against the parent's currency, the parent mayprefer to ____ the remittance of subsidiary earnings.a. weaken; delayb. weaken; expeditec. appreciate; expedited. none of the aboveANS: B PTS: 128. If an MNC invests excess cash in a foreign county, it would like the foreign currency to ____; if anMNC issues bonds denominated in a foreign currency, it would like the foreign currency to ____.a. appreciate; depreciateb. appreciate; appreciatec. depreciate; depreciated. depreciate; appreciateANS: A PTS: 129. Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada.Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus hasdetermined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1percent, it experiences a reversal of 40 percent on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.a. depreciate by .8%; todayb. depreciate by .8%; tomorrowc. appreciate by .8%; todayd. appreciate by .8%; tomorrowANS: BSOLUTION: e t +1 = (2%) ⨯ (-40%) = -0.8%PTS: 130. Corporations tend to make only limited use of technical forecasting because it typically focuses on thenear future, which is not very helpful for developing corporate policies.a. Trueb. FalseANS: T PTS: 131. Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the followingequation for the euro:euro t = b0 + b1INF t- 1 + b2INC t- 1= .005 + .9INF t- 1 + 1.1INC t- 1The most recent quarterly percentage change in the inflation differential between the U.S. and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the U.S. and Europe was -1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____%.a. appreciation; 3.4b. depreciation; 3.4c. appreciation; 0.7d. appreciation; 1.2ANS: DSOLUTION: euro t = .005 + .9(.02) + 1.1(-.01) = 1.2%PTS: 132. The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rateis expected to be 3 percent. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $____.a. 1.02b. 1.03c. 1.04d. none of the aboveANS: CSOLUTION:E(S t + 1) = $1.03(1.0097) = $1.04PTS: 133. If the one-year forward rate for the euro is $1.07, while the current spot rate is $1.05, the expectedpercentage change in the euro is ____%.a. 1.90b. 2.00c. -1.87d. none of the aboveANS: ASOLUTION: E(e) = 1.07/1.05 - 1 = 1.90%PTS: 134. If both interest rate parity and the international Fisher effect hold, then between the forward rate andthe spot rate, the ____ rate should provide more accurate forecasts for currencies in ____-inflation countries.a. spot; highb. spot; lowc. forward; highd. forward; lowANS: C PTS: 135. If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount willbe ____, meaning that the forward rate and spot rate will provide ____ forecasts.a. substantial; similarb. substantial; very differentc. close to zero; similard. close to zero; very differentANS: C PTS: 136. Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting.a. technicalb. fundamentalc. market-basedd. none of the aboveANS: B PTS: 137. Silicon Co. has forecasted the Canadian dollar for the most recent period to be $0.73. The realizedvalue of the Canadian dollar in the most recent period was $0.80. Thus, the absolute forecast error as a percentage of the realized value was ____%.a. 9.6b. -9.6c. 8.8d. -8.8ANS: CSOLUTION:PTS: 138. The absolute forecast error of a currency is ____, on average, in periods when the currency is more____.a. lower; volatileb. higher; stablec. lower; stabled. none of the aboveANS: C PTS: 139. If the foreign exchange market is ____ efficient, then historical and current exchange rate informationis not useful for forecasting exchange rate movements.a. weak-formb. semistrong-formc. strong formd. all of the aboveANS: D PTS: 140. Foreign exchange markets are generally found to be at least ____ efficient.a. weak-formb. semistrong-formc. strong formd. none of the aboveANS: B PTS: 141. MNCs can forecast exchange rate volatility to determine the potential range surrounding theirexchange rate forecast.a. Trueb. FalseANS: T PTS: 142. If the pattern of currency values over time appears random, then technical forecasting is appropriate.a. Trueb. FalseANS: F PTS: 143. Inflation and interest rate differentials between the U.S. and foreign countries are examples ofvariables that could be used in fundamental forecasting.a. Trueb. FalseANS: T PTS: 144. A regression analysis of the Australian dollar value on the inflation differential between the U.S. andAustralia produced a coefficient of .8. Thus, for every 1% increase in the inflation differential, the Australian dollar is expected to depreciate by .8%.a. Trueb. FalseANS: F PTS: 145. The most sophisticated forecasting techniques provide consistently accurate forecasts.a. Trueb. FalseANS: F PTS: 146. If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciateor depreciate by the same amount as the forward premium or discount, respectively.a. Trueb. FalseANS: T PTS: 147. Research indicates that currency forecasting services almost always outperform forecasts based on theforward rate.a. Trueb. FalseANS: F PTS: 148. When measuring forecast performance of different currencies, it is often useful to adjust for theirrelative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors.a. Trueb. FalseANS: T PTS: 149. The closer graphical points are to the perfect forecast line, the better is the forecast.a. Trueb. FalseANS: T PTS: 150. Foreign exchange markets appear to be strong-form efficient.a. Trueb. FalseANS: F PTS: 151. A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.a. Trueb. FalseANS: T PTS: 152. Two methods to assess exchange rate volatility are the volatility of historical exchange ratemovements and the exchange rate's implied standard deviation from the currency option pricingmodel.a. Trueb. FalseANS: T PTS: 153. Market-based forecasting involves the use of historical exchange rate data to predict future values.a. Trueb. FalseANS: F PTS: 154. Fundamental models examine moving averages over time and thus allow the development of aforecasting rule.a. Trueb. FalseANS: F PTS: 155. A forecasting technique based on fundamental relationships between economic variables and exchangerates, such as inflation, is referred to as technical forecasting.a. Trueb. FalseANS: F PTS: 156. Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is usedfor longer-term forecasts.a. Trueb. FalseANS: F PTS: 157. If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to bevery accurate.a. Trueb. FalseANS: F PTS: 158. If foreign exchange markets are strong-form efficient, then all relevant public and private informationis already reflected in today's exchange rates.a. Trueb. FalseANS: T PTS: 159. Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the majorcurrencies, but not for currencies of smaller countries.a. Trueb. FalseANS: F PTS: 160. The potential forecast error is larger for currencies that are more volatile.a. Trueb. FalseANS: T PTS: 161. A forecast of a currency one year in advance is typically more accurate than a forecast one week inadvance since the currency reverts to equilibrium over a longer term period.a. Trueb. FalseANS: F PTS: 162. In general, any key managerial decision that is based on forecasted exchange rates should relycompletely on one forecast rather than alternative exchange rate scenarios.a. Trueb. FalseANS: F PTS: 163. Monson Co., based in the U.S., exports products to Japan denominated in yen. If the forecasted valueof the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ thepayments.a. higher; to hedgeb. lower; not to hedgec. higher; not to hedged. none of the aboveANS: C PTS: 164. When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, itwill always accept that project if the foreign currency is expected to appreciate.a. Trueb. FalseANS: F PTS: 165. The following is not a limitation of technical forecasting:a. It's not suitable for long-term forecasts of exchange rates.b. It doesn't provide point estimates or a range of possible future values.c. It cannot be applied to currencies that exhibit random movements.d. It cannot be applied to currencies that exhibit a continuous trend for short-term forecast.ANS: D PTS: 166. The following regression model was estimated to forecast the percentage change in the AustralianDollar (AUD):AUD t = a0 + a1INT t + a2INF t- 1 + μt,where AUD is the quarterly change in the Australian Dollar, INT is the real interest rate differential in period t between the U.S. and Australia, and INF is the inflation rate differential between the U.S. and Australia in the previous period. Regression results indicate coefficients of a0 = .001; a1 = -.8; and a2 = .5. Assume that INF t- 1 = 4%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:Probability Possible Outcome20% -3%80% -4%There is a 20% probability that the Australian dollar will change by ____, and an 80% probability it will change by ____.a. 4.5%; 6.1%;b. 6.1%; 4.5%c. 4.5%; 5.3%d. None of the aboveANS: CSOLUTION: Probability 20% = .001 + (-.8)(-.03) + (.5)(.04) = 4.5%Probability 80% = .001 + (-.8)(-.04) + (.5)(.04) = 5.3%PTS: 167. Purchasing power parity is used in:a. technical forecasting.b. fundamental forecasting.c. market-based accounting.d. all of the above.ANS: B PTS: 168. If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on theyen, they will ____ the yen forward and put ____ pressure on the yen's forward rate.a. higher; buy; upwardb. higher; sell; downwardc. higher; sell; upwardd. lower; buy; upwardANS: A PTS: 169. If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forwardrate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on theCanadian dollar forward rate.a. lower; sell; upwardb. lower; sell; downwardc. higher; sell; upwardd. higher; sell; downwardANS: B PTS: 170. Assume that U.S. annual inflation equals 8%, while Japanese annual inflation equals 5%. If purchasingpower parity is used to forecast the future spot rate, the forecast would reflect an expectation of:a. appreciation of yen's value over the next year.b. depreciation of yen's value over the next year.c. no change in yen's value over the next year.d. information about interest rates is needed to answer this question.ANS: A PTS: 171. Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the international Fishereffect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:a. appreciation of pound's value over the next year.b. depreciation of pound's value over the next year.c. no change in pound's value over the next year.d. not enough information to answer this question.ANS: B PTS: 172. If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecastingexchange rate movements.a. weak-formb. semistrong-formc. strong formd. all of the aboveANS: D PTS: 173. If today's exchange rate reflects any historical trends in Canadian dollar exchange rate movements, butnot all relevant public information, then the Canadian dollar market is:a. weak-form efficient.b. semistrong-form efficient.c. strong-form efficient.d. all of the above.ANS: A PTS: 174. Leila Corporation used the following regression model to determine if the forecasts over the last tenyears were biased:S t = a0 + a1F t- 1 + μt,where S t is the spot rate of the yen in year t and F t- 1 is the forward rate of the yen in year t -1.Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corporation has reason to believe that its past forecasts have ____ the realized spot rate.a. overestimatedb. underestimatedc. correctly estimatedd. none of the aboveANS: A PTS: 175. Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assumethat Canadian interest rates for the next three years are 3%, 6%, 9%. The current Canadian spot rate is $.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-yearforward rate is used as a forecast?a. $.840b. $.890c. $.856d. $.854ANS: CSOLUTION: {[(1.05)(1.06)(1.07)]/[(1.03)(1.05)(1.08)]} ⨯ $.84 = $.856PTS: 176. Which of the following is not one of the major reasons for MNCs to forecast exchange rates?a. to decide in which foreign market to invest the excess cash.b. to decide where to borrow at the lowest cost.c. to determine whether to require the subsidiary to remit the funds or invest them locally.d. to speculate on the exchange rate movements.ANS: D PTS: 177. Sensitivity analysis allows for all of the following except:a. accountability for uncertainty.b. focus on a single point estimate of future exchange rates.c. development of a range of possible future values.d. consideration of alternative scenarios.ANS: B PTS: 178. If graphical points lie above the perfect forecast line, than the forecast overestimated the future value.a. Trueb. FalseANS: F PTS: 179. A regression model was applied to explain movements in the Canadian dollar's value over time. Thecoefficient for the inflation differential between the U.S. and Canada was -0.2. The coefficient of the interest rate differential between the U.S. and Canada produced a coefficient of 0.8. Thus, theCanadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.a. increases; increasesb. decreases; increasesc. increases; decreasesd. increases; decreasesANS: C PTS: 180. If the pattern of currency values over time appears random, then technical forecasting is appropriate.a. Trueb. FalseANS: F PTS: 181. Market-based forecasting is based on fundamental relationships between economic variables andexchange rates.。

国际金融中英文版Chapter 2:Payments among NationsSingle-Choice QuestionsA country’s balance of payments records: 一个国家的国际收支平衡记录了 BThe value of all exports of goods and services from that country for a period of time.All flows of value between that country’s residents and residents of the rest of the world during a period of time.在一定时间段里,一个国家居民的资产和其它世界居民资产的流动All flows of financial assets that cross that country’s borders during a perio d of time.All flows of goods into that country during a period of time.A credit item in the balance of payments is: 在国际收支平衡里的贷项是AAn item for which the country must be paid.一个国家必须收取的条款An item for which the country must pay.Any imported item.An item that creates a monetary claim owed to a foreigner.Every international exchange of value is entered into the balance-of-payments accounts __________ time(s). 每一次国际等价交换都记进国际收支帐户２次B1234A debit item in the balance of payments is: 在国际收支平衡中的借项是BAn item for which the country must be paid.An item for which the country must pay.一个国家必须支付的条款Any exported item.An item that creates a monetary claim on a foreigner.In a nation's balance of payments, which one of the following items is always recorded as a positive entry? D在国际收支中,下列哪个项目总被视为有利条项Changes in foreign currency reserves.Imports of goods and services.Military foreign aid supplied to allied nations.Purchases by foreign travelers visiting the country.国外游客在本国发生的购买The sum of all of the debit items in the balance of payments: 在收支平衡中,所有贷项的总和 BEquals the overall balance.Equals the sum of all credit items.等于所有借项的总和Equals the sum of credit items minus errors and omissions.Which of the following capital transactions are entered as debits in the U.S. balance of payments? 下列哪个资本交易在美国的收支平衡中当作借项？ BA U.S. resident transfers $100 from his account at Credit Suisse in Basel (Switzerland) to his account at a San Francisco branch of Wells Fargo Bank.A French resident transfers $100 from his account at Wells Fargo Bank in San Francisco to his Credit Suisse account in Basel.一个法国居民在旧金山的Fargo Bank用其帐户转帐１００美金到位于巴塞尔的瑞士信贷户口A U.S. resident sells his IBM stock to a French resident.A U.S. resident sells his Credit Suisse stock to a French resident.An increase in a nation's financial liabilities to foreign residents is a: 一个国家对另一个国家金融负债的增加是一种CReserve inflow.Reserve outflow.Capital inflow.资本流入Capital outflow.___A_______ are money-like assets that are held by governments and that are recognized by governments as fully acceptable for payments between them. 官方国际储备资产是一种类似于钱的资产，这种资产由政府掌握并作为政府间的一种支付手段得到充分认可.Official international reserve assets 官方国际储备资产Unofficial international reserve assetsOfficial domestic reserve assetsUnofficial domestic reserve assetsWhich of the following is considered a capital inflow? 下列哪项被视为资本流入 AA sale of U.S. financial assets to a foreign buyer.美国一金融资产卖给一外国买家A loan from a U.S. bank to a foreign borrower.A purchase of foreign financial assets by a U.S. buyer.A U.S. citizen’s repayment of a loan from a foreign bank.In a country’s balance of payments, which of the following transactions are debits?一个国家的收支平衡表中,哪个交易属于借项？ ADomestic bank balances owned by foreigners are decreased.外国人拥有的国内银行资产的下降Foreign bank balances owned by domestic residents are decreased.Assets owned by domestic residents are sold to nonresidents.Securities are sold by domestic residents to nonresidents.The role of ___D_______ is to direct one nat ion’s savings into another nation’s investments: 资金流的作用是指导一个国家的储蓄进入到另一个国家的投资Merchandise trade flowsServices flowsCurrent account flowsCapital flows资金流Capital account.Current account.经常账目（户）Trade balance.Official reserve balance.The net value of flows of financial assets and similar claims (excluding official international reserve asset flows) is called the: 金融资产和类似的资产（官方国际储备资产流除外）的净值流叫AFinancial account.金融帐Current account.Trade balance.Official reserve balance.The financial account in the U.S. balance of payments includes: 美国国家收支表中的金融帐包括： BEverything in the current account.U.S. government payments to other countries for the use of military bases.美政府采用其它国家军事基地所需支付款项Profits that Nissan of America sends back to Japan.New U.S. investments in foreign countries.ＡU.S. resident increasing her holdings of a foreign financial asset causes a:一个美国居民增持一外国金融资产会引起DCredit in the U.S. current account.Debit in the U.S. current account.Credit in the U.S. capital account.Debit in the U.S. capital account.美国资本帐的借帐A foreign resident increasing her holdings of a U.S. financial asset causes a:一个美国居民增持本国一金融资产会引起 CCredit in the U.S. current account.Debit in the U.S. current account.Credit in the U.S. capital account.美国资本帐的贷帐Debit in the U.S. capital account.A deficit in the current account: 经常帐户中的赤字 ATends to cause a surplus in the financial account.会导致金融帐中的盈余Tends to cause a deficit in the financial account.Has no relationship to the financial account.Is the result of increasing exports and decreasing imports.In September, 2005, exports of goods from the U.S. decreased $3.3 billion to $73.4 billion, and imports of goods increased $3.8 billion to $144.5 billion. This increased the deficit in:20xx年8月,美国商品出口降低了33亿美元,共734亿美元；商品进口上升到1145亿美元,上长了38亿.这样增加了哪个方面的赤字？CThe balance of payments.The financial account.The current account.经常帐户Unilateral transfers.Which of the following would contribute to a U.S. current account surplus? 以下哪项有助于美国现金帐的盈余？ BThe United States makes a unilateral tariff reduction on imported goods.The United States cuts back on American military personnel stationed in Japan.美国削减在日本的军事人员U.S. tourists travel in large numbers to Asia.Which of the following transactions is recorded in the financial account?以下哪个交易会被当作金融帐AA Chinese businessman imports Ford automobiles from the United States.A U.S. tourist spends money on a trip to China.The New York Yankees are paid $10 million by the Chinese to play an exhibition game in Beijing, China.If a British business buys U.S. government securities, how will this be entered in the balance of payments? 如果一英国商人购买了美国政府的债券,那么这个交易在收支平衡表中会被当作是？ CIt will appear in the trade account as an import.It will appear in the trade account as an export.It will appear in the financial account as an increase in U.S. assets held by foreigners.会被当作是外国人所有的美国资产增长It will appear in the financial account as a decrease in U.S. assets held by foreigners.In the balance of payments, the statistical discrepancy or error term is used to: 在收支平衡表中, 统计差异与错误项目会用来确保借帐总和跟贷帐总和一致 AEnsure that the sum of all debits matches the sum of all credits.Ensure that imports equal the value of exports.Obtain an accurate account of a balance-of-payments deficit.Obtain an accurate account of a balance-of-payments surplus.Official reserve assets are: 官方储备资产是 BThe gold holdings in the nation’s central bank.Money like assets that are held by governments and that are recognized by governments as fully acceptable for payments between them. 官方国际储备资产是一种类似于钱的资产，这种资产由政府掌握并作为政府间的一种支付手段得到充分认可Government T-bills and T-bonds.Government holdings of SDR’sGold.Special Drawing Rights.IMF Reserve Positions.Foreign Currencies.外汇（币）The net accumulation of foreign assets minus foreign liabilities is: 海外净资产的积累减去外债等于CNet official reserves.Net domestic investment.Net foreign investment.国外投资净值Net foreign deficit.A country experiencing a current account surplus: 一个国家经历经常帐户的盈余 BNeeds to borrow internationally.Is able to lend internationally.就有能力向外放贷Must also have had a surplus in its "overall" balance.The ___C_______ measures the sum of the current account balance plus the private capital account balance. 官方结算差额是指经常帐户余额的总和加上私人资本帐（B=CA+FA,FA:为非官方投资和储备）Official capital balanceUnofficial capital balanceOfficial settlements balance官方结算差额Unofficial settlements balanceIf the overall balance is in __A________, there is an accumulation of official reserve assets by the country or a decrease in foreign official reserve holdings of the country's assets. 如果综合差额处于盈余，那么会出现本国官方储备资产的积累或者国外官方储备的减少（B=CA+FA,B+OR=0，OR:官方储备金额）Surplus盈余DeficitBalanceForeign handsWhich of the following is the current account balance NOT equal to? 以下哪项不等同于现金帐 DThe difference between domestic product and domestic expenditure.The difference between national saving and domestic investment.Net foreign investment.The difference between government saving and government investment. 政府储蓄与政府投资的差值True/False QuestionsCapital inflows are debits and capital outflows are credits. 资金流入是借项，资金外流是贷项The net flow of financial assets and similar claims is the private current account balance. 金融资产和类似的资产的净值叫经常帐目余额The majority of countries' official reserves assets are now foreign exchange assets, financial assets denominated in a foreign currency that is readily acceptable in international transactions. (T)大部份官方储备资产作为以外汇资产和金融资产为命名的外币在世界上交易与流通.A country's financial account balance equals the country's net foreign investment.一个国家的金融帐差额相当于一个国家的净国外投资A country has a current account deficit if it is saving more than it is investing domestically.一个国家如果在国内的储蓄比投资要大,那么会出现经常账目赤字The official settlements balance measures the sum of the capital account balance plus the public current account balance. 官方结算差额是资金帐户余额的总额加上公共经常帐户余额A nation's international investment position shows its stock of international assets and liabilities at a moment in time. (T)一个国家的国际投资状况反映出它在特定时间里的国际资产股份以及债务情况.A nation is a borrower if its current account is in deficit during a time period. (T)在一段时间内,如果一个国家的经常帐出现赤字,那么它就是借方.A nation is a debtor if its net stock of foreign assets is positive. 如果一个国家的国外资产净储备是正数,那么它是借方（债务方）A transaction leading to a foreign resident increasing her holdings of a U.S. financial asset will be recorded as a debit on the U.S. financial account.如果一项交易引起一外国居民增持美国金融资产的股份,那么这项交易在美国金融帐中会被当作借项A credit item is an item for which a country must pay. 贷项是指一个国家必须还款的条项Gold is a major reserve asset that is currently often used in official reserve transactions. 黄金作为主要的储备资产,常被用在官方储备交易当中.The current account balance is equal to the difference between domestic product and national expenditure.(T)经常项目余额等于国民生产与国民支出的差额In 2007 U.S. households, businesses and government were buying more goods and services than they were producing.(T)____年,美国家庭,商业,政府购买的商品和服务比他们生产（商品和服务）的要多.6。

1International FinanceAssignment Problems (2) Name: Student No.:I. Choose the correct answer for the following questions (only ONE correct answer)(5 credits for each question, total credits 4 x 15 = 60)1. According to the principle of the balanced balance of payments, if a country reduces its foreign exchange reserves by $20 million and the statistical discrepancy is in the credit entry of $5 million in a given period of time, the country runs __________ of its balance of payments during that period of time.A. $15 million deficitsB. $25 million deficitsC. $20 million deficitsD. $5 million deficits2. If a country’s domestic saving is greater than domestic investment, the country probably has __________.A. a current account surplusB. a net capital outflowC. a current account deficitD. Both A and B are possible.3. A debit entry in the balance-of-payments account represents a transaction that __________.A. a domestic resident receives a payment from abroadB. a domestic resident makes a payment to a foreign residentC. will improve the current account statusD. will have no affects on the nation’s foreign exchange reserves4. In terms of balance-of-payments account, which of the following would be recorded as a debit entry in the U.S. BOP?A. exports of merchandiseB. exports of servicesC. purchase of the U.S. Treasury bonds by non-residentsD. an increase of the deposit in a U.S. resident's account at a foreign bank5. A balance-of-payments deficit is defined as a situation in which __________.A. the value of payments made to the foreigners exceeds the value of receipts received from the foreigners in a given period of timeB. the government must borrow in order to meet its budget obligationsC. the value of manufactured good exports is less than the value of imported goodsD. a nation earns much in extra assets or reduced liabilities in its dealings with the rest of the world6. Which of the following would NOT be considered as a typical BOP transaction?A. Toyota USA is a US distributor of automobiles manufactured in Japan by its parent company.B. A U.S. subsidiary of European financial giant, Credit Suisse, pays dividends to its parent in Zurich.C. A US tourist purchases gifts at a museum in London.D. All are example of BOP transactions.7. The balance of payments is a statistical record which measures the total value of __________.A. a country’s foreign exchange reserves in a certain period of timeB. a country’s foreign trades between the residents of a country and its non-residents for a given period of timeC. all economic and financial transactions between the residents of a country and its non-residents for a given period of timeD. a country’s capital inflows and outflows at a particular date in a given year8. A British pension fund sells some of its holdings of the stocks of U.S. companies in order to buy U.S. corporate bonds. This transaction will affect __________.A. the U.S. international investment positionB. the British international investment positionC. both countries’ international investment positionD. None of the above. This is because both countries’ international investment position unchanged, only the composition of foreign investments in both U.S. and U.K. changes.9. Which of the following transactions is included in China’s balance-of-payments account?A. A U.S. embassy in Beijing pays salaries to its American staffs.B. The World Bank furnishes the Chinese government with a loan.C. A U.S. student pays tuition fees for his 4 year-study in Beijing University.D. The Chinese embassy in Washington buys telecommunication equipments from a Chinese company in Shanghai.10. If the U.S. runs current account deficits, we can expect that __________.A. it may act as a net debtor in the rest of the worldB. its domestic saving may less than its domestic investmentC. its domestic production is less than its domestic consumptionD. all of the above11. The trade deficit means that __________.A. residents are importing more goods than they are exportingB. residents are borrowing more funds than they are lendingC. residents are receiving more payments than they are makingD. residents are producing more goods than they are consuming12. Which of the following is an example of an exchange of financial assets?A. the exchange of butter for wheatB. the exchange of information technologyC. the exchange of a fixed-rate loan for a floating-rate loanD. the exchange of gold for jewelry13. For most countries, the subcategory that typically dominates the current account is __________.A. unilateral transfersB. goods tradeC. income tradeD. services trade14. When categorizing investments for the financial account component of the balance of payments the __________ is an investment where the investor has no incentive to control whereas the __________ is an investment where the investor wants to control over the assets.A. direct investment, portfolio investmentB. direct investment, indirect investmentC. portfolio investment, indirect investmentD. portfolio investment, direct investment15. If a country’s merchandise exports exceed its imports by $50 million, services trade balance is net $30 million and unilateral transfers made in excess of those received by $5 million, what is the country’s current account balance?A. $85 millionB. $75 millionC. $15 millionD. $25 million1. Country A’s BOT is __________.2. Country A’s current account balance is __________.3. Suppose the changes in country A’s official reserves are zero in 2010, its capital and financial account balance MUST be __________.4. If country A’s official reserves are recorded on the credit side by $10 million in 2010, its capital and financial account balance should be __________.5. Based on the assumption of question 4, country A has BOP deficit or surplus in 2010? Explain.6. What is the current account balance of a nation with a government budget deficit of $128 billion, private saving of $806 billion, and domestic capital formation of $777 billion?III. Express the following operations in the Dutch balance of payments in T-accounts:(5 credits for each question, total credits 3 x 5 = 15)a. A Dutch company exports €100,000 goods to a London company for €100,000 in bank deposits.b. An import billed for €150,000 paid with a check drawn on a London bank.c. A Dutch company based in Rotterdam uses €1 million that it was holding in a short-term deposit with its Rotterdam bank to purchase 10-year bonds issued by German government.IV. True or false: (7 credits)A credit entry in the balance of payments represents a demand for local currency whereas a debit entry represents a supply of local currency. You MUST explain your answer.Part IVTrue. Because the credit entry in BOP means domestic residents receiving foreigncurrencies. When they sell those foreign payments, they demand the local currency. The debit entry in BOP implies domestic residents need to buy foreign currencies with the local currency. Therefore, it represents a supply of local currency.。

CHAPTER 9VALUATION OF COMMON STOCKSObjectives∙To explain the theory and application of the discounted cash flow valuation method as applied to the equity of a firm.Outline9.1 Reading Stock Listings9.2 The Discounted Dividend Model9.3 Earnings and Investment Opportunities9.4 A Reconsideration of the Price/Earnings Multiple Approach9.5 Does Dividend Policy Affect the Value of a Share?Summary∙The discounted cash flow (DCF) method of valuing assets consists of discounting expected future cash flows ata risk-adjusted discount rate.∙The discounted dividend model (DDM) for valuing shares of stock starts from the observation that an investor in common stock expects a rate of return (consisting of cash dividends and price appreciation) that is equal to the market capitalization rate. The resulting formula shows that the current price of a share is the present value of all expected future dividends.∙In the constant growth rate DDM, the growth rate of dividends is also the expected rate of price appreciation.∙Growth per se does not add value to a share’s current price. What adds value is the opportunity to invest in projects that yield a rate of return in excess of the market capitalization rate.∙In a “frictionless” financial envir onment, where there are no taxes and no transaction costs, the wealth of shareholders is the same no matter what dividend policy the firm adopts.∙In the real world there are a number of frictions that can cause dividend policy to have an effect on the wealth of shareholders. These include taxes, regulations, the costs of external finance, and the information content of dividends.Solutions to Problems at End of Chapter1.The DDM Corporation has just paid a cash dividend (D0) of $2 per share. It has consistently increased its cash dividends in the past by 5% per year, and you expect it to continue to do so. You estimate that the market capitalization rate for this stock should be 13% per year.a.What is your estimate of the intrinsic value of a share (derived using the DDM model)?b.Suppose that the actual price of a share is $20. By how much would you have to adjust each of thefollowing model parameters to “justify” this observed price:i.The growth rate of dividendsii.The market capitalization rateSOLUTION:a.P0 = D0(1+g)/(k-g) = 2(1+0.05)/(0.13-0.05) = $26.25b.If the actual price of the share is $20, then some of our input parameters might need some adjustments:i.Assuming all other parameters are left as given, then solving for g =(.13 x 20 – 2)/(2+20) = 0.0273= 2.73%ii.Similarly, solving for k = 2(1.05)/20 + 0.05 = 0.155 = 15.5%2.The Rusty Clipper Fishing Corporation is expected to pay a cash dividend of $5 per share this year. You estimate that the market capitalization rate for this stock should be 10% per year. If its current price is $25 per share, what can you infer about its expected growth rate of dividends?SOLUTION:D1 = $5; k = 10%; P0= $25Hence g = 0.1 - 5/25 = -0.1 = -10%3. The Constant Growth Corporation (CGC) has expected earnings per share (E1) of $5. It has a history of paying cash dividends equal to 20% of earnings. The market capitalization rate for CGC’s stock is 15% per year, and the expected ROE on the firm’s future investments is 17% per year? U sing the constant growth rate discounted dividend model,a. What is the expected growth rate of dividends?b. What is the model’s estimate of the present value of the stock?c. If the model is right, what is the expected price of a share a year from now?d.Suppose that the current price of a share is $50.By how much would you have to adjust each of the following model parameters to “justify” this observed price:i.The expected ROE on the firm’s future investments.ii.The market capitalization rateiii.The dividend payout ratio.SOLUTION:a. g = earnings retention ratio x ROE = .8 x .17 = .136 = 13.6%b. P0 = D1/(k-g)D1 = .2 x $5 = $1 per shareP0 = $1/(.15 -.136) = $1/.014 = $71.43c. The stock price grows at the same rate as dividends, i.e., 13.6% per year:P1 = P0 x (1 + g) = $71.43 x 1.136 = $81.14d.If the market is efficient then the $50 price represents the best estimate of the stock’s true value. To “justify” thisprice, one of the input parameters in the model needs to be adjusted:i.Assuming all other parameters are correct, if we were to adjust for the ROE:50 = D1/(k-g), where g = 0.8 x ROESolving for g, then for ROE: g = .15 – 1/50 = 0.13 = 13%,hence ROE is equal to 13/0.8 = 16.25%ii. If we were to adjust the market capitalization k then:k = 1/50 + .136 = .156 = 15.6%iii.Dividend payout ratio x E1 = 50 x (.15-.136) = 0.7,hence Dividend payout ratio = 0.7/5=0.14 = 14%4. The stock of Slogro Corporation is currently selling for $10 per share. Earnings per share in the coming year are expected to be $2 per share. The company has a policy of paying out 60% 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 forever.a. Assuming the current market price of the stock reflects its intrinsic value as computed using the constantgrowth rate DDM, what rate of return do Slogro’s investors require?b. By how much does its value exceed what it would be if all earnings were paid as dividends and nothingwere reinvested?c. If Slogro were to cut its dividend payout ratio to 25%, what would happen to its stock price? What ifSlogro eliminated the dividend altogether?d. Suppose that Slogro wishes to maintain its current 60% dividend payout policy but that it also wishes toinvest an amount each year equal to that year’s total earnings. All the money would be invested inprojects earning 20% per year. One way that Slogro could do so would be to issue an amount of new stock each year equal to one-half that year’s earnings. What do you think would be the effect of this policy on the current stock price?SOLUTION:a. P0 = $10, E1 = $2, b = .4, ROE = .2k = D1/P0 + gD1 = .6 x $2 = $1.20g = b x ROE = .4 x .2 = .08Therefore, k = $1.20/$10 + .08 = .12 + .08 = .2 or 20%b. If all earnings were paid as dividends its price would be:P0 = $2/.2 = $10Thus, its price is the same whether it reinvests or not. This is because k = ROE.c. Since k = ROE, the stock price would be unaffected by cutting the dividend and investing the additionalearnings.d.Again, this should have no impact on the stock’s price since the NPV of the investments would be zero (the IRRof those projects (20%) is equal to the investors’ required rate of return, hence the firm’s c ost of capital).5. The Corporation currently pays no cash dividends, and it is not expected to for the next 5 years. Its sales have been growing at 25% per year.a.Can you apply the constant growth rate DDM to estimate its intrinsic value? Explain.b.It is expected to pay its first cash dividend $1 per share 5 years from now. It its market capitalization rateis 20% and its dividends are expected to grow by 10% per year, what would you estimate its intrinsic value to be?c.If its current market price is $100 per share, what would you infer the expected growth rate of its futuredividends to be?SOLUTION:a.Yes, we can apply the DDM model even if the company doesn’t pay dividends for the first 5 years. Thecompany will eventually have to pay dividends in the future.b.P4 = D5/(k-g) = 1/(.2-.1) = $10P0 = 10/1.24 = $4.82c.If P0 = $100 then P4 = 100 x 1.24 = 207.36 and g = 0.2 – 1/207.36 = 19.518%6. The Digital Growth Corp. pays no cash dividends currently and is not expected to for the next 5 years. Its latest EPS was $10, all of which was reinvested in the company. The firm’s expected ROE for the next 5 years is 20% per year, and during this time it is expected to continue to reinvest all of its earnings. Starting 6 years from now, the firm’s ROE on new investments is expected to fall to 15%, and the company is expected to start paying out 40% of its earnings in cash dividends, which it will continue to do forever after. DG’s market capitalization rate is 15% per year.a. What is your estimate of DG’s int rinsic value per share?b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its priceover the next year? The year after?c. What effect would it have on your estimate of DG’s intrinsic value if you expecte d DG to pay out only20% of earnings starting in year 6?56P0 = P5/(1+k)5 = $180.82/1.155 = $89.90b.The price should rise by 15% per year until year 5 after which it will grow at the dividends’ growth rate g (=9%).c. Since ROE =k, the dividend payout ratio will have no effect on current price.7. The 2Stage Co. just paid a dividend of $1 per share. The dividend is expected to grow at a rate of 25% per year for the next 3 years and then to level off to 5% per year forever. You think the appropriate market capitalization rate is 20% per year.a. What is your estimate of the intrinsic value of a share of the stock?b. If the market price of a share is equal to this intrinsic value, what is the expected dividend yield?c. What do you expect its price to be one year from now? Is the implied capital gain consistent with yourestimate of the dividend yield and the market capitalization rate?P 3 = D 4/(k – g) = 2.05078/(.20 -.05) = $13.67P 0 = D 1/(1+k) + D 2/(1+k)2 + (D 3 + P 3)/(1+k)3 = $1.25/1.2 + $1.5625/1.22 + ($1.953 + $13.67)/1.23 = $11.17 b. If the market price of a share is equal to this intrinsic value, the expected dividend yield is D 1/P 0, which is1.25/11.17 = .1119 or 11.2%c. Its price one year from now = P 1 = D 2/(1+k) + (D 3 + P 3)/(1+k)2 = $1.5625/1.2 + ($1.953 + $13.67)/1.22 =$12.15.The implied capital gain is $12.15 - $11.17 = $.98, which is 8.8% of the price P 0. Thus the dividend yield plusthe capital gain rate add up to 20%, which is k.8. The Bearded ladies’ Stock guide offers the following method for selecting stocks:Compute the stock’s PEG ratio by dividing its P/E mu ltiple by its growth rate of earnings. Select only those stocks whose PEG ratio is in the lowest quartile.a. If the stock is fairly priced according to the constant-growth-rate DDM, what should be its PEG ratio asa function of the following three variables: the stock’s market capitalization rate (k), the expectedprofitability of its future investments (ROE), and its plowback ratio (b)? (Assume the P/E ratio used in computing PEG is the ratio of the stock’s current price to its expected earnings per share, P 0/E 1)b. Assume the CAPM and the DDM are valid. The risk free rate is .04 and the risk premium on the marketportfolio is .06. What should be the relationship between the PEG for a stock whose ROE is .10 and a stock whose ROE is .15, assuming the two stocks have the same beta (equal to 1) and plowback ratio (equal to .6)?c. What do you think of the Bearded Ladies’ method?SOLUTION:a. If the DDM holds we know that P 0 = D 1 / (k-g), furthermore, we know that g = b x ROE and D 1=(1-b) E 1b(ROE)(k -b(ROE))b (ROE)b E k -b(ROE)E )b (g E P PEG -=⨯-==1111110b. The values of k for each of the stocks will be: k = .04 + .06 beta = .04 + .06 =.1PEG 1= (1-.6) / (.6 x .10 x (.1 - .6 x .10)) = 166.67PEG 2= (1-.6) / (.6 x .15 x (.1 - .6 x .15)) = 444.44PEG 1 < PEG 2c. As we can see in part b, the PEG rule would lead us to choose the stock with the lowest ROE.In general, if the stock market is informally efficient, then any stock will offer an expected rate of return that is commensurate with the stock’s perceived market risk, regardless of the stock’s PEG.Using the Internet for Stock Pricing9. Pick a company whose stock is traded on the NYSE. Use one of the stock valuation models discussed in this chapter together with information that you can find by searching the Internet to compute an intrinsic value for the s tock. Compare your estimate of intrinsic value with the stock’s actual price. Would you be willing to make an investment decision on the basis of your research? Why or why not?SOLUTION:One simple model that we can use to value a company is to find the average P/E multiple of the industry in which the company operates and multiply it by the expected earnings per share of that company. The difference between this intrinsic value and the actual market value of the stock can be explained by the difference between our assumptions regarding the company’s future investment opportunities and the market’s expectations. For example, if the market value of the stock is higher than the intrinsic value found, then this difference reflects the investors’ belief that the company will have a greater-than-average future investments opportunities with a rate of return greater than the market capitalization rate for this particular industry. If markets are efficient, then this market value is supposed to be the “real” value o f the company, and represents the view of the majority of investors, hence I would be reluctant to follow my own findings of the intrinsic value as a basis for an investment decision.Dividend Policy10. Divido Corporation is an all-equity financed firm with a total market value of $100 million. The company holds $10 million in cash-equivalents and has $90 million in other assets. There are 1,000,000 shares of Divido common stock outstanding, each with a market price of $100. What would be the impact on Di vido’s stock price and on the wealth of its shareholders of each of the following decisions? Consider each decision separately.a. The company pays a cash dividend of $10 per share.b. The company repurchases 100,000 shares.c. The company pays a 10% stock dividend.d. The company has a 2-for-1 stock split.e. The company invests $10 million in an expansion that has an expected IRR equal to the firm’s cost ofcapital.SOLUTION:a.The stock price falls by $10, but shareholder wealth remains the same in a frictionless world becauseshareholders receive $10 in cash on each share they own. In the real world, shareholder’s wealth may decline because personal taxes may have to be paid on the cash dividend.b.The stock price is unchanged and so is shareholder wealth. Some of the shareholders who sold their shares mayhave to pay taxes on their capital gains in the real world.c.The number of shares outstanding rises to 1,100,000, and the stock price falls to $90.909 (=$100MM/$1.1MM)per share. Shareholder wealth is unchanged: instead of having one share at $100, now the shareholder will have1.1 shares at $90.909/share (1.1 x 90.909 = 100)d.The number of shares outstanding rises to 2,000,000, and the stock price falls to $50 per share. Theoretically,shareholder wealth is unchanged.e.The composition of the firm’s assets changes. Cash falls by $10 million and other assets go up by the sameamount. There is no change in either the stock price or in shareholder wealth.11. It has been found empirically, that on average the total market value of their stock rises when firms announce a stock split. What hypotheses might you offer to explain this phenomenon?SOLUTION:Theoretically, when a firm announces a stock-split, the number of shares doubles (if 2-to-1 stock split) and the market value per share drops by half. Empirically, we have observed a small increase in market value of the stock after the announcement of a stock-split. This can be explained by the informational content of the split. Outside investors may interpret this stock dividend as a positive sign that the company is doing well, hence increasing the price of the stock. Another possible interpretation is that since the price per share is now lower after the split, it can become more affordable for some investors.12. Suppose that a company has had an extraordinarily profitable year, and it announces that it will use most of its net cash inflow to buy back shares of its stock in the market. Would you expect the price of its stock to rise or fall when the announcement is made? Explain.SOLUTION:Theoretically, the price of the stock should not change after a stock repurchase. But the announcement could send a positive signal to investors that the company has been doing very well and has enough cash to buy back shares as a form of dividends. This might increase the price of the stock after the announcement.。