185k views
3 votes
Suppose that a share of Kroger had a closing price yesterday of $100, but new information was announced after the market closed that caused a revision in the forecast of the price for next year to go to $130. If the stock pays a 20 dollar dividend, and the annual equilibrium return is 10%, what does the efficient market hypothesis indicate the price will be today?

A. $134.33
B. $136.36
C. $130.15

User AndrewS
by
8.1k points

1 Answer

0 votes

Final answer:

According to the efficient market hypothesis, taking into account the revised forecast for next year's price of $130 and the $20 dividend, the expected price today with a 10% required return for a share of Kroger would be $136.36, which is option B.

Step-by-step explanation:

The efficient market hypothesis suggests that all available information is already factored into the stock price. Since the share price of Kroger was $100 yesterday and there's an announcement after market close that revises the forecast for next year's price to $130, plus a dividend payment of $20, we can calculate the expected price today based on the 10% required return. The calculation is the sum of next year's forecast price and the dividend, divided by 1 plus the required return.

To find the expected price today, we use the formula:

Price today = (Next year's forecast price + Dividend) / (1 + Required return)

Substituting the numbers we get:

Price today = ($130 + $20) / (1 + 0.10)

Price today = $150 / 1.10

Price today = $136.36

Therefore, according to the efficient market hypothesis, the price today will be option B. $136.36.

User Matheus Domingos
by
7.9k points