1. Investor A and investor B both have required rates of return of 12%. They are considering the purchase of XTRA stock, which each views as a constant growth case. Both have estimated the dividend for the next period at $1.00, and both agree that the expected growth rate in dividends will be 6% a year. However, investor A plans to buy the stock and hold it for 10 years, while investor B plans to buy the stock and hold it for ONLY 1 year. Which of the following statements is CORRECT about stock valuation?

a. Investor A should be willing to pay more for this stock than B.

b. Investor B should be willing to pay more for this stock than A.

c. Both investors should be willing to pay the same price for the stock.

d. None of these.

2. Low Labs. last dividend was $1.50. Its current equilibrium stock price is $15.75, and its expected growth rate is a constant 5 percent. If the stockholders' required rate of return is 15 percent, what is the expected dividend yield and expected capital gains yield for the coming year?

a. 0%; 15%

b. 5%; 10%

c. 10%; 5%

d. 15%; 0%