Question

5. If you want to increase your purchasing power by 5%, what is the required nominal rate when the inflation rate is 3%?

A 3.0%

B 5.0%

C 8.0%

D 8.2%

E 15.0%

6. High Country Builders currently pays an annual dividend of $1.35 and plans on increasing that amount by 2.5 percent each year. Valley High Builders currently pays an annual dividend of $1.20and plans on increasing its dividend by 3 percent annually. Given this information, you know for certain that the stock of High Country Builders' has a lower _______ than the stock of Valley High Builders

A market price

B dividend yield

C capital gains yield

D total return

E The answer cannot be determined based on the information provided

Answer 1

(1 + Nominal rate) = (1 + Real rate)* (1 + inflation rate)

(1 + Nominal rate) = (1 + 0.05)* (1 + 0.03)

(1 + Nominal rate) = 1.0815

Nominal rate = 1.0815 – 1

                        = 0.0815 – 1

                        = 8.15% or 8.2%

Correct option is D

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We need required rate of return to calculate stock price, or to calculate dividend yield and capital gain yield.

So the correct answer is E.

Information is not enough

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