Your aunt, Beth, plans to invest in the common stock of Smart-investment Corporation. Knowing that you are studying finance, she asks for your suggestion. You calculation shows that yield on Treasury securities is 6%. You know that the S&P 500 Indexs expected annual return is 14%. Aunt Beth tells you that this company just paid an annual dividend of $2. After collecting as much information about this firm as possible, you expect the firms dividend will grow at an annual rate of 7% forever. The stock is sold for $32 per share for the time being.

22. The firms dividend of next year is expected to be _____. a. $1.75 b. $2.00 c. $2.14 d. $2.44 23.

23. The market risk free rate is _____. a. 6% b. 7% c. 14%

24. The expected return of the market portfolio is _____. a. 6% b. 7% c. 14%

25. The valuation of the stock is _____. a. $32.00 b. $28.57 c. $29.75 d. $30.57

26. Your suggestion to aunt Beth is _____. a. buy this stock because it is underpriced b. do not buy this stock because it is overpriced