Question

1. If the interest rate is rising and stock prices are simultaneously rising, then according to the fundamental theory of stock pricing

There must be irrational agents in the market

The expected dividends of firms must be falling

The future price of the stock must be falling

Expected dividends of firms must be rising 2. Consider the stable growth or steady state model of a stock price. If the price of the stock is $40 per share, the yield on the relevant bond is 6%, and the growth rate of dividends is expect to be 4%, then the current dividend will be to two decimals (do not use a $, so 1.13, not $1.13)    3. Suppose everyone believes that an increase in the unemployment rate will lower dividend payments in the future.   Suppose a week from tomorrow when the BLS announces the unemployment rate for March, it announces an increase, but stock prices do not change. Then this is evidence that   there are animal spirit agents in the market people already knew that the unemployment rate would be higher the interest rate must have risen that markets are not forward looking 4. Assume the fundamental value theory of stock pricing holds. If you are a rational investor, and you own shares of Cintas stock, then you expect to receive capital gains from holding this stock there may be a bubble in the price of this stock you may be shorting this stock Cintas stock sells for the present value of its expected dividend stream

Answer 1

1. The interest rate has a negative effect on the stock market

Irrational agents; least resistance; more inertial than logical

2. The range for a stock price can be calculated using Markov Chains, and, the steady-state model of the stock price.

3. Employers cut investment and hiring due to financing difficulties; dividend paid thus decreases

People already knew that unemployment rate will be higher; the impact of the increase in unemployment would have been factored in.

4. You expect to receive capital gains from holding this stock