Question

Part III. In this part, please explain the short question with T-accounts. (20 points) If the Central bank makes an open market purchase of $100 million from a bank, please use T-account to explain the change of the bank and the central bank's balance sheets (10 points). Suppose that the currency-to-deposits ratio is 2%, the required reserve ratio is 10%, and the excess reserves ratio is 3%, compute the money multiplier (5 points) and the change on money supply (M) (5 points). Part IV. This part has 2 Calculation Questions. The total points for this part are 25 points. 1. If the last dividend of XYZ Company's stock was $1, and the required rate of return is 10% p.a. What is the company's stock price if the given dividends are expected to grow at a rate of 5% p.a. indefinitely? (10 points) 2. If the required return is 8% P.A, which of the following two instruments has a higher present value? (15 points) 2 # 3

please quickly help me with this economics money and banking question.Thank you

Part IV

Answer 1

1. We will need to use the stable model formula from the Gordon growth model. This formuls says

Value of stock=Current Dividend/(investor discount rate-dividend growth rate).

It is given that

Current Dividend=1

Discount rate=10%

Dividend growth rate=5%

Putting values, we get

1/(.1-.05)=1/.05=$20

2. Part 2 is not posted fully it seems. Using values from part 1 and solving.

Putting 8%, we get

1/(.08-.05)

=1/.03=$33.33