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1. 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. 18.43%
c. 15.87%
d. 21.53%
2. Ted has been dollar cost averaging in a mutual fund by investing $1,500 at the beginning of every quarter for the past 5 years. He has been earning an average annual compound return of 9.5% compounded quarterly on this investment. How much is the fund worth today?
$37,687.36
$38,208.04
$38,737.18
$39,274.91
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