1. Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust pays a guaranteed 4% rate of return. How much will you receive each year if the trust is required to pay you all of the interest earnings on an annual basis?
a. $5,400
b. $4,500
c. $4,000
d. $6,000
e. $3,750
2. The risk-free rate is 4%; the market risk premium is 8%. LDC Company’s stock has a beta of 1.5. The last dividend was $4, and the dividend growth rate (g) is expected to be a constant of 10%. The stock’s current market price (P0) is $70.
If you buy the stock now, what is the expected rate of return for the first year? Assume that the stock price will reach the equilibrium level at t=1 if it is currently mispriced.
a. 24.75%
b. 15.87%
c. 21.53%
d. 18.43%