1. 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. 18.43%

c. 15.87%

d. 21.53%

2. Ted has been dollar cost averaging in a mutual fund by investing $1,500 at the beginning of every quarter for the past 5 years. He has been earning an average annual compound return of 9.5% compounded quarterly on this investment. How much is the fund worth today?

$37,687.36

$38,208.04

$38,737.18

$39,274.91