Problem 5 Calculating Real Rates of Return. . If Treasury bills are currently paying 2.05% and the inflation rate is 0.5%, what is the exact real rate of interest? The exact real rate of interest is______%.

Problem 6: Nominal and Real Returns. An investment offers a 14 % total return over the coming year. Crystal Prediction thinks the total real return on this investment will be only 11%. Given this one can infer that Crystal believes the inflation rate will be _____ % over the next year.

Problem 7: Stock Values

Courageous, Inc. just paid a dividend of $3.00 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. If investors require a 12 percent return on Courageous stock, what is the current price? What will the price be in three years? In 15 years?

1. Current Price $_____________

2. Price in 3 Years $____________

3. Price in 15 Years $___________

Problem 8: Stock Values

The next dividend payment by ASAP, Inc., will be $0.98 per share. The dividends are anticipated to maintain a 3 percent growth rate, forever. If ASAP stock currently sells for $4.75 per share, what is the required return?

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