Question

1) Suppose the real rate is 3.45 percent and the inflation rate is 2.2 percent. What rate would you expect to earn on a Treasury bill? 

A) 1.25 percent 

B) 7.75 percent 

C) 5.73 percent 

D) 6.56 percent 

E) 3.30 percent 

2) The common stock of Dayton Repair sells for $47.92 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock?  

A) 6.14 percent 

B) 6.41 percent 

C) 9.92 percent 

D) 4.84 percent 

E) 7.28 percent

Answer 1

ANSWER :

1.

Real rate = 3.45% = 0.0345

Inflation = 2.2% = 0.022

So,

Expected treasury rate 

= (1 + real rate)(1 + inflation rate) -  1

= (1 + 0.0345)(1 + 0.022) - 1

= 0. 0573

= 5.73% (ANSWER)

2.

Given :

P₀ = 47.92($)

D₁ = 2.28 ($)

g = 1.65 % = 0.0165

Now,

Dividend yield = D₁/P₀ 

= 2.28/47.92

= 0.0476

Market rate of return, r 

= Dividend yield + g

= 0.0476+ 0.0165

= 0.0641

= 6.41% 

So, market rate of return = 6.41 % (ANSWER).