1. John's made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $1.60 a share. Secondly, the company announced that all future dividends will increase by 6% annually. What is the maximum amount you should pay to purchase a share of Sam's stock if your goal is to earn a 10% rate of return?
a. $38.60
b. $40.00
c. $42.00
d. $43.50
e. $46.00
2. The common stock of Smart Toys, Inc. sells for $31.20 a share. The stock is expected to pay $1.50 per share next year when the annual dividend is distributed. Smart Toys has established a pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock?
a. 12.91%
b. 11.72%
c. 10.44%
d. 9.32%
e. 8.81%