1. If the interest rate is rising and stock prices are simultaneously rising, then according to the fundamental theory of stock pricing:
A. The expected dividends of firms must be falling
B. Expected dividends of firms must be rising
C. The future price of the stock must be falling
D. There must be irrational agents in the market
2. What must an investor do to achieve a higher rate of return when the market risk premium is lower?
3. Consider the stable growth or steady state model of a stock price. If the price of the stock is $40 per share, the yield on the relevant bond is 6%, and the growth rate of dividends is expect to be 4%, then the current dividend will be?
4. Calculate the required rate of return for Mudd Enterprises assuming that investors expect a 3.4% rate of inflation in the future. The real risk-free rate is 2%, and the market risk premium is 3.5%. Mudd has a beta of 1.3, and its realized rate of return has averaged 10% over the past 5 years. Round your answer to two decimal places.