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1/ What is marginal rate of return?
2/ What is hypothesis?
3/ What does P/E give meanings to? I know only that time span to cover investment. How can I elaborate it further?
4/ What does dividend yield give meanings to? I know only that estimation of dividend paid in respect to the market value of share. How can I elaborate it further?
5/ In assumption and limitation of CAPM, It is stated in bpp kit that:
CAPM is unable to forecast accurate rate of returns for companies that has lower P/E ratio?5/ The question ask why share price rose even with loss,my answer was precisely right but bpp added further as terminologies about capital market efficiecny. In which they stated about semi-strong efficiency. Though I know about it, but why it is relevant to discuss this theory in this kind of situation ie share price rose…etc??
I know it gonna cost you frustration about reading and writing, but it gonna really help more than what you are teaching as videos. 🙂
Many Thanks
1. Marginal rate of return is the extra return from something. However it is not really relevant usually to mention in the exam.
2. A hypothesis is a suggestion that has yet to be proved.
3. A higher PE ratio suggest that shareholders are expecting higher growth in the future.
(To illustrate: suppose shareholders are expecting future earnings to be 10 per annum constant in the future, and are prepared to pay 100. The PE ratio is 100/10 = 10.
Suppose another company has current earnings of 10, but shareholders expect that it will grow a lot in the future. They will be prepared to pay more for the share – maybe they will be prepared to pay 120. So the PE ratio for that company is 120/10 = 12. Why is it higher? Because they are expecting higher growth in the future.)4. Dividend yield will be of interest to investors because it tells them the %’age return on their investment. However, the big problem with it (and the reason it is of limited use) is that it uses current dividend and takes no account of the fact that dividends may grow in the future.
5. It is difficult to comment on what BPP have written without seeing the whole paragraph and context. On its own, I do not like it. CAPM in practice can never forecast accurately (whether the PE is low or high) because we do not live in a perfect world!!
6. Any calculations relating to share prices assume that the theories work precisely. One of the main reasons why share prices in practice are not always what they should be in theory are because shareholders do not have enough information. If they new for certain what the company was planning and therefore what earnings/dividends were going to be in the future, then maybe share prices would be ‘perfect’. However in practice they do not have all the information and therefore share prices are affected by their guesses/assumptions.
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