1. Suppose you and most other investors expect the inflation rate to be 3.00% next year, 4.00% during the following year, and then to remain at a rate of 5.00% thereafter. Assume that the real risk-free rate will remain at 1.00% and that maturity risk premiums on Treasury securities rise from zero on very short- term securities to a level of 0.10% percentage points for 1-year securities. Furthermore, maturity risk premiums increase 0.10 percentage points for each year to maturity, up to a limit of 1.00 percentage point on 10-year or longer-term T-notes and T-bonds.

Calculate the interest rate on a 5-year Treasury securities.

5.70%

6.30%

5.90%

6.10%

2. An issue of common stock is selling for $57.40. The year end dividend is expected to be $2.75 assuming a constant growth rate of 5%. What is the required rate of return? (Round your answer to 1 decimal place.)

11.8

10.3

9.8

9.3