1) A share of stock is expected to pay a dividend of 2 one year from now and a dividend of 3 two years from now. Thereafter, dividends will be paid annually, with each dividend being g% greater than the previous dividend. The effective annual interest rate is 8.5%, and the price of the share of stock is 112.50. Find g.

(ANS: g=6%)

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2)Suppose you are the actuary for an insurance company. Your company, in response to a policyholder claim involving physical injury, is responsible for making annual medical payments. The first payment will occur on January 1, 2008, and the final payment will occur on January 1, 2031. The first payment will be $100,000; after that, the payments will increase annually for inflation, at a rate of 5% per year. The real interest rate is 3% per year. Find the present value of these future payments as of December 31, 2005.

(ANS: Pv=1,411,363)

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