Question 1:

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 capital return of the stock is 3%

b.

The dividend at time t=3 will be $2.185

c.

The share price at time t=0 is $34.33

d.

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

e.

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

Question 2:

You discover an investment costing $2,000 which has an expected total return of 13% pa, but a required return of only 9% pa. Of the 13% pa total expected return, the capital return is expected to be 7% pa. Assume that the required return of 9% remains constant, the dividends can only be re-invested at 9% pa and all returns are given as effective annual rates.

Which of the following statements is NOT correct?

a.

The expected dividend return is 6%

b.

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

c.

You would use a discount rate of 13% to find the NPV of this investment

d.

The investments price at time t=20 would be $7,739.37

e.

The investment is currently under-priced