Question 3: (3 Points)

a. (1 Point) Define the term real interest rate.

b. (2 Points) If the nominal interest rate per year is 10 percent and the inflation rate is 4 percent, what is the real rate of interest?

Question 4: (3 Points) Ayomide Corp. expects to pay a dividend of $2 per share at the end of year 1, $3 per share at the end of year 2, and then be sold for $32 per share at the end of year 2. If the required rate of return on the stock is 15 percent, what is the current value of the stock?