Question

This violates the semistrong form efficiency because the price adjustment is not instant Question 3 (20 points) The return on equity for Kalavis Corporation is 15 percent. The company distributes 40 percent of its earnings as dividend. The remaining part is reinvested in company projects. The company announced to distribute $1.6 dividend per share, immediately. The required rate of return for similar corporations' common stock is 12 percent. What part of this value coming from the present value of the growth opportunities (PVGO)? O $19.5 $21.8 $17. $23.5 Question 4 (2 points) Which of the following is not one of the forms of market officiency?

Answer 1

3]

PVGO = value of share - (next year EPS / cost of equity)

value of share = current dividend per share * (1 + growth rate) / (cost of equity - growth rate)

growth rate = ROE * (1 - dividend payout ratio) = 15% * (1 - 40%) = 9%

value of share = $1.6 * (1 + 9%) / (12% - 9%) = $58.13

next year EPS = current year EPS * (1 + growth rate)

current year EPS = current year dividend per share / dividend payout ratio

next year EPS = ($1.6 / 40%) * (1 + 9%) = $4.36

PVGO = value of share - (next year EPS / cost of equity)

PVGO = $58.13 - ($4.36 / 12%)

PVGO = $21.80