In the generalized dividend model, if the expected sales price is in the distant future

it does not affect the current stock price.

it is more important than dividends in determining the current stock price.

it is equally important with dividends in determining the current stock price.

it is less important than dividends but still affects the current stock price.

In the generalized dividend model, a future sales price far in the future does not affect the current stock price because

the present value is almost zero.

the present value cannot be computed.

the sales price does not affect the current price.

In the generalized dividend model, the current stock price is the sum of

the present value of the future dividend stream.

the actual value of the future dividend stream.

the present value of the future dividend stream plus the actual future sales price.

the present value of the future sales price.

Using the Gordon growth model, a stock's current price will increase if

the dividend growth rate increases.

the growth rate of dividends falls.

the required rate of return on equity rises.

the expected sales price rises.

Using the Gordon growth model, a stock's current price decreases when

the growth rate of dividends decreases.

the dividend growth rate increases.

the required return on equity decreases.

the expected dividend payment increases.

In the Gordon growth model, a decrease in the required rate of return on equity

increases the current stock price.

increases the future stock price.

reduces the future stock price.

reduces the current stock price.

A corporation's dividend payment is set by

the corporation's CFO (chief financial officer).

In asset markets, an asset's price is

set by the buyer willing to pay the highest price.

set equal to the highest price a seller will accept.

set equal to the highest price a buyer is willing to pay.

set equal to the lowest price a seller is willing to accept.

New information that might lead to a decrease in a stock's price might be

an expected decrease in the level of future dividends.

a decrease in the required rate of return.

an expected increase in the dividend growth rate.

an expected increase in the future sales price.

A change in perceived risk of a stock changes

the expected dividend growth rate.

A stock's price will fall if there is

an increase in the required rate of return.

an increase in the future sales price.

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant.

increases; required rate of return; dividend growth rate

reduces; future sales price; expected rate of return

reduces; current dividend; expected rate of return

increases; required rate of return; future sales price

The coronavirus pandemic lead to a decline in stock prices because

of a lowered expected dividend growth rate.

of a lowered required return on investment in equity.

higher expected future stock prices.

Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that

expectations influence the behavior of participants in the economy and thus have a major impact on economic activity.

expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets.

expectations influence many individuals, have little impact on the overall economy, but can have distributional effects.

models that ignore expectations have little predictive power, even in the short run.

If expectations are formed adaptively, then people

use only the information from past data on a single variable to form their expectations of that variable.

use more information than just past data on a single variable to form their expectations of that variable.

often change their expectations quickly when faced with new information.

never change their expectations once they have been made.

The major criticism of the view that expectations are formed adaptively is that

this view ignores that people use more information than just past data to form their expectations.

it is easier to model adaptive expectations than it is to model rational expectations.

adaptive expectations models have no predictive power.

people are irrational and therefore never learn from past mistakes.

If expectations are formed rationally, then individuals

change their forecast when faced with new information.

will have a forecast that is 100% accurate all of the time.

use only the information from past data on a single variable to form their forecast.

have forecast errors that are persistently low.

If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are

still considered to be formed rationally.

An expectation may fail to be rational if

relevant information is available but ignored at the time the forecast is made.

relevant information was not available at the time the forecast is made.

information changes after the forecast is made.

information was available to insiders only.

According to rational expectations theory, forecast errors of expectations

are more likely to be negative than positive.

are more likely to be positive than negative.

tend to be persistently high or low.

People have a strong incentive to form rational expectations because

they are guaranteed of success in the stock market.

If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to

change the way they form expectations about future values of the variable.

begin to make systematic mistakes.

no longer pay close attention to movements in this variable.

give up trying to forecast this variable.

According to rational expectations

expectations will not differ from optimal forecasts using all available information.

expectations of inflation are viewed as being an average of past inflation rates.

expectations of inflation are viewed as being an average of expected future inflation rates.

expectations formation indicates that changes in expectations occur slowly over time as past data change.

On rainy days, Jennifer's commute time to work averages 45 minutes. Before leaving, Jennifer hears on the radio that a street on her route is closed due to high water. She plans to add an additional 15 minutes to her commute because of the detour. This decision represents

rational expectations. She is changing her expectations to reflect new information.

adaptive expectations. She is adapting her plan to what she heard.

irrational expectations. Everyone knows that radio news is unreliable.

irrational expectations. She should just call in sick and not get out in the bad weather.

chapter 7

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chapter 7

82 questions

A stockholder's ownership of a company's stock gives her the right to

Stockholders are residual claimants, meaning that they

Periodic payments of net earnings to shareholders are known as

The value of any investment is found by computing the

In the one-period valuation model, the value of a share of stock today depends upon

In the one-period valuation model, the current stock price increases if

In the one-period valuation model, an increase in the required return on investments in equity

In a one-period valuation model, a decrease in the required return on investments in equity causes a(n) in the price of a stock.

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be

Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be

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chapter 7

82 questions

A stockholder's ownership of a company's stock gives her the right to

Stockholders are residual claimants, meaning that they

Periodic payments of net earnings to shareholders are known as

The value of any investment is found by computing the

In the one-period valuation model, the value of a share of stock today depends upon

In the one-period valuation model, the current stock price increases if

In the one-period valuation model, an increase in the required return on investments in equity

In a one-period valuation model, a decrease in the required return on investments in equity causes a(n) ________ in the ________ price of a stock.

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be

Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be

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In a one-period valuation model, a decrease in the required return on investments in equity causes a(n) in the price of a stock.