1. Why do firms pay dividends? What, in general, are the advantages and disadvantages of paying cash dividends (1 point)? 2. Suppose FPL will pay an annual dividend of $2.48 in 1994, and assume the market risk premium (RMR) is 7.5% and the risk free interest rate is 7.3% (the current yield on 30- year T-bonds from Exhibit 8), and FPL Group Inc. stock is selling at $34 per share, what is the expected capital gains yield of FPL stock (2 points)? Hint: Recall in chapter 7 you've learned that the total return (the expected rate of return) is equal to dividend yield plus capital gains (loss) yield. You may apply CAPM to find the expected return on FPL stock. 3. From FPL's perspective, is the current payout ratio appropriate? Would a higher or lower payout ratio more appropriate (2 points)? Explain and justify your answer based on information in the case. 4. From an investor's perspective, is the FPL's payout ratio appropriate (2 points)? Explain and justify your answer based on information in the case. 5. As Kate Stark, what would you recommend regarding investment in FPL's stock buy, sell, or hold (2 points)?