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Q1) If the nominal return on U
Q1) If the nominal return on U.S. Treasury bills is 14 percent while the rate of expected inflation is anticipated to be 5 percent, then what should real rate of return be?
- 10.5%
- 8.5%
- 9.8%
- 11%
Q2) Your firm paid a dividend $4.2 this year. The dividend is expected to grow at a constant rate of 8 percent. If the required rate of return is 16%, What is the value of your firm’s stock?
- $43.5
- $56.7
- $52.5
- $45
Q3) You own 5,000 shares Split. The shares are currently selling for $75. If the company has just announced a 4-for-1 stock split, How many shares will you own after the split?
a. 10,000
b. 20,000
c. 15,000
d. 5,000
Expert Solution
Please find the answer below.
Statement showing computation:
1) Calculate of real rate of return:
(1+real rate)= (1+nominal rate)/(1+inflation rate)
(1+real rate)= (1+0.14)/(1+0.05)
1+real rate= 1.085
Real rate= 0.085
So correct answer is b)8.5%
2) Calculation of value of stock:
Value of stock= dividend (1+growth)/(required return-growth)
Value of stock= 4.2*(1+0.08)/(0.16-0.08)
Value of stock= 4.2*1.08/0.08= 56.7
So correct answer is b)$56.7
3) Calculation of number of shares:
Number of shares= 5000*4= 20000
So correct answer is b)20000
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