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A stock pays annual dividends. It just paid a dividend of $2. The growth rate in the dividend is 3% pa. You estimate that the

A stock pays annual dividends. It just paid a dividend of $2. The growth rate in the dividend is 3% pa. You estimate that the stock's required return is 9% pa. Both the discount rate and growth rate are given as effective annual rates.

Which of the following statements is NOT correct?

a.

The share price at time t=0 is $34.33

b.

Dividend growth rate is equal to the long term expected dividend yield.

c.

The dividend at time t=3 will be $2.185

d.

The capital return of the stock is 3%

e.

Total return of the stock is equal to the company's long term cost of equity.

2) You discover an investment costing $5,000 which has an expected total return of 14% pa, but a required return of only 10% pa. Of the 14% pa total expected return, the capital return is expected to be 9% pa. Assume that the required return of 10% remains constant, the dividends can only be re-invested at 10% pa and all returns are given as effective annual rates.

Which of the following statements is NOT correct?

a.

The investments price at time t=20 would be $28,022.05

b.

You would use a discount rate of 10% to find the NPV of this investment

c.

The investment is currently over-priced

d.

The expected dividend return is 5%

e.

When plotted on the Security Market Line, the investment would have a positive alpha.

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