The following is the Dividend Discount Model used to price stocks:

### p_0=\frac{d_1}{r-g} ###

Which of the following statements about the Dividend Discount Model is **NOT** correct?

A firm has forecast its Cash Flow From Assets (CFFA) for this year and management is worried that it is too low. Which one of the following actions will lead to a higher CFFA for this year (t=0 to 1)? Only consider cash flows this year. Do not consider cash flows after one year, or the change in the NPV of the firm. Consider each action in isolation.

A company's shares just paid their annual dividend of $2 each.

The stock price is now $40 (just after the dividend payment). The annual dividend is expected to grow by 3% every year forever. The assumptions of the dividend discount model are valid for this company.

What do you expect the effective annual **dividend yield** to be in 3 years (dividend yield from t=3 to t=4)?

Let the variance of returns for a share per month be ##\sigma_\text{monthly}^2##.

What is the formula for the variance of the share's returns per year ##(\sigma_\text{yearly}^2)##?

Assume that returns are independently and identically distributed (iid) so they have zero auto correlation, meaning that if the return was higher than average today, it does not indicate that the return tomorrow will be higher or lower than average.

**Question 446** working capital decision, corporate financial decision theory

The working capital decision primarily affects which part of a business?

Which of the following terms about options are **NOT** synonyms?

A **one** year European-style **put** option has a strike price of $**4**. The option's underlying stock pays no dividends and currently trades at $**5**. The risk-free interest rate is **10**% pa continuously compounded. Use a **single** step binomial tree to calculate the option price, assuming that the price could rise to $**8** ##(u = 1.6)## or fall to $**3.125** ##(d = 1/1.6)## in one year. The put option price now is: