All rates are annual i.e. per year.

A two-year bond's interest rate is 13.0% and the expected annual inflation rate is 6.5%.

a.	What is the expected real interest rate? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Expected real interest rate

%

b-1.

If the expected rate of inflation suddenly rises to 8.5%, what does Fishers theory say about how the real interest rate will change?

	Real rate does not change
	Real rate increases
	Real rate decreases

b-2.	What about the nominal rate? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Nominal rate

%

Parcel Corporation expects to pay a dividend of $5 per share next year, and the dividend payout ratio is 50%. If dividends are expected to grow at a constant rate of 8% forever, and the required rate of return on the stock is 13%, calculate the present value of growth opportunities.

$100.00

$76.92

$23.08

$69.54

Consider three investors:

a. Mr. Single invests for one year.

b. Ms. Double invests for two years.

c. Mrs. Triple invests for three years.

Company Zs earnings and dividends per share are expected to grow indefinitely by 5% a year, the next years dividend is $10 and the market capitalization rate is 8%.

Assume each invests in company Z, what is the expected rate of return per year that each investor earns? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

	Expected Rate of Return
Mr. Single	%
Ms. Double	%
Mrs. Triple	%