70.2K

Verified Solution

Link Copied!

Lala Beauty is a famous chain of personal health and beauty retailer offering comprehensive range of personal care, skin care and baby care products. It is a listed company in Hong Kong Stock Exchange. Suppose there is certainty that a company earns a profit of $1,000,000 every year forever and that the whole of this profit will be distributed to shareholders as dividend. And the company has issued in total 200,000 shares to shareholders.

(a) What will be the price of each share if the interest rate is 5% per annum?

(b) Alice is one of the investors of the stock market. Originally, she has no intention of buying Lala Beautys shares. However, after its share price has risen quite sharply in one morning, she decides to buy some shares. Is Alices action an exception to the law of demand?

(c) Boris is a speculator who tries to buy low and sell high to make a profit. If he succeeds in making a profit out of his speculative activities, by using demand and supply diagrams, show how will his actions affect the demand for OR supply of shares in the stock market during (i) periods when he thinks current prices are relatively low? (ii) periods when he thinks current prices are relatively high? Besides, do you think speculators (who are successful in making money) will make share prices more stable or less stable?

Answer & Explanation Solved by verified expert

See Answer