1. Compare and contrast Capital Asset Pricing Model (CAPM) with Arbitrage Pricing Theory (APT). What is the single most important issue with CAPM? Which model is more realistic? Why?
2. Why is stock valuation considerably less precise than bond valuation? Give at least two reasons.
3. Today, IBM paid a dividend of $1.50 per share. Investors think that IBM’s dividend will grow at 5% for the next four years. After that, the dividend will be constant at $3. What should be the price per share of IBM if the discount rate is 8%?