true or false and explain. thanks in advance. 1. According to the dividend discount model, the...

true or false and explain. thanks in advance.

1. According to the dividend discount model, the value an investor assigns to a share of stock is dependent upon the length of time the investor plans to hold the stock.

2. If the yield to maturity of a bond is greater then It's coupon rate, the market value of the bond will always be below its par value.

3. the weighted average cost of capital reflects the average cost of the various sources of financing that a firm uses to support its assets.

Expert Solution

1 Ans: False -- The Dividend discount model is not dependent on any individual investor or how long you plan to hold the stock. Organisations are considered as going concerns, that is they will exist forever. So while using dividend discount model, it is considered that the company will give the dividend forever.

2Ans: True. Yield to maturity(YTM) of a bond is its discounting factor. So if the coupun rate of a bond is 5% and its YTM is 7%. Then it means that the bond is getting increased at a rate of 5%, but it is discounted at a higher rate, that is 7%. So obviously the price of the bond is below par.

There is another way to think. Say that in market, all others are paying a rate of 7%, but your bond is only paying 5%. So it is not attractive to other investors. so it will trade below par.

3Ans: True - Weighted Average cost of capital is how much on average the firm spent on capital to support its projects. Each source of capital is charged differently. So at the end of a period, the weightage of all the sources are found and average is calculated. Different sources of capital are Debt, Preferred shares, common shares etc.

jeff jeffy answered 2 years ago

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