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Sample question on Chapter 7
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Sample question in Chapter 7
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MGEC71 Sample Questions1. Explain in words how pricing a stock is similar to pricing a bond. Assume the stock is held for n
periods and then is sold AND does not pay any dividends. What kind of bond is this like? Hint:
You may write down the mathematics if this helps.
2. Explain in words how pricing a stock is similar to pricing a bond. Assume the stock is held for n
periods and then is sold AND pays a dividend of $D per year. What kind of bond is this like? Hint:
You may write down the mathematics if this helps.
3. Explain in words how pricing a stock is similar to pricing a bond. Assume the stock is held forever
AND pays a dividend of $D per year. What kind of bond is this like? Hint: You may write down
the mathematics if this helps.
4. Explain in words how pricing a stock is similar to pricing a bond. Assume the stock is held
forever, pays a dividend of $D per year AND this dividend grows at g (per cent per year). What
kind of bond is this like? Hint: You may write down the mathematics if this helps.
5. Derive an expression for the (maximum) price an investor is willing to pay for a dividend paying
bond assuming it is to be held forever and pays a dividend of $D per year (forever). Define all
notation used.
6. Derive an expression for the (maximum) price an investor is willing to pay for a dividend paying
bond assuming it is to be held forever and pays a dividend of $D per year but this dividend is
growing at a rate of g per year (forever). Define all notation used.
7. Derive an expression for the (maximum) price an investor is willing to pay for a dividend paying
bond assuming it is to be held for n years and pays a dividend of $D per year (forever). Explain
how and why the equation derived differs from that derived in Q5 above. Define all notation
used.
8. Derive an expression for the (maximum) price an investor is willing to pay for a dividend paying
bond assuming it is to be held for n years and pays a dividend of $D per year but this dividend is
growing at a rate of g per year (forever). Explain how and why the equation derived differs from
that derived in Q6 above. Define all notation used.
9. Suppose people suddenly revise upwards their expectation of the probability a firm will go
bankrupt five or more years forward from today. Write down an expression for the maximum
price an investor is willing to pay for this firm’s dividend paying shares. Assume the dividend has
been fixed at $D per year for many years in the past. Compare this expression to the one written
down in chapter 7 (and in our lecture slides). Explain any and all differences between these two
formulas.
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