1. According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso 10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.
A) overvalued; approximately 21%
B) overvalued; approximately 27%
C) undervalued; approximately 21%
D) undervalued; approximately 27%
E) None of the Above
2. Suppose DeepMind Inc. will pay $1.50 per share in dividends next year. The require return on the stock is 10% and its dividends will grow by 2% per year indefinitely. Under which of the following scenarios would you be willing to pay more than $18.75 today?
A) All else being equal, the required return is more than 10%
B) All else being equal, the dividend next year will be $1.20.
C) All else being equal, the growth rate of the dividends is greater than 2%.
D) You would be willing under both (A) and (C).