1. You are considering the purchase of a stock that is currently selling at $64 per share. You expect the stock to pay $4.5 in dividends next year.

a. If dividends are expected to grow at a constant rate of 3 percent per year, what is your expected rate of return on this stock? b. If dividends are expected to grow at a constant rate of 5 percent per year, what is your expected rate of return on this stock? c. What do your answers to part (a) and part (b) indicate about the impact of dividend growth rates on expected rate of returns on stocks?

2. Icy Candy announces a 1 for 8 bonus issues. Icing Candy shares are trading at $9.00 before the bonus issue. a. Calculate the theoretical price of Icing Candys shares immediately after the bonus issue. b. Casper has 1,000 shares in Icy Candy before Icing Candy announced the 1 for 8 bonus issue. i. How many bonus shares will Casper entitle to? ii. Find the value of Caspers stockholding in Icy Candy before and after the bonus issue.

3. Eason plans to open a do-it-yourself dog bathing center in Petland. The bathing equipment will cost $50,000. Eason expects the after-tax cash inflows to be $15,000 annually for 8 years, after which he plans to scrap the equipment. a. Find the projects payback period. b. What is the projects discounted payback period if the required rate of return is 10%? c. What is the projects net present value (NPV) if the required rate of return is 10%? d. What is the projects Profitability Index (PI) if the required rate of return is 20%? Should the project be accepted according to the rule of PI?

4. How do corporate stocks differ from bonds? Explain.