a) Using the one-period valuation model describe how the following might affect share prices:

i. An increase in interest rates (5 Marks)

ii. Reduction in the riskiness of equity investment (5 Marks)

b) Distinguish between the following:

i. Adaptive expectations and Rational Expectations (10 Marks)

ii. Economic bubbles and Market fundamentals (10 Marks)

c) Compute the current price of a stock if the dividends of the firm are expected to grow at 20% on average and the required return is 25%. The firms last dividend was 1.80. (10 Marks)

d) Assume that the price of a share for Tesco plc last year was 2.44 and a 50p dividend was paid out at the end of the year. Calculate the rate of return required for equity investment next year. Tesco plc share price is expected to be 3.00. (10 Marks) (Total 50 Marks)