The market risk premium is estimated at 5%, the risk free rate is 1%, and the firm's beta is 1.25.

1. What is the required rate of return on the firms stock?

2. If the last dividend were $2.00 and investors expect a constant growth of 4%, what would be the value of the firms stock?

3. What would be the stocks dividend yield?

4. What would be the stocks expected capital gains yield?

5. If expected inflation increases by 1%, describe in words what will happen to the security market line and the value of the stock holding all other factors constant.