Required to pay you all of interest earnings on annual basis

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1. Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust pays a guaranteed 4% rate of return. How much will you receive each year if the trust is required to pay you all of the interest earnings on an annual basis?

a. $5,400

b. $4,500

c. $4,000

d. $6,000

e. $3,750

2. The risk-free rate is 4%; the market risk premium is 8%. LDC Company’s stock has a beta of 1.5. The last dividend was $4, and the dividend growth rate (g) is expected to be a constant of 10%. The stock’s current market price (P0) is $70.

If you buy the stock now, what is the expected rate of return for the first year? Assume that the stock price will reach the equilibrium level at t=1 if it is currently mispriced.

a. 24.75%

b. 15.87%

c. 21.53%

d. 18.43%

Reference no: EM131975296

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