5. An investment offers a 14 percent total return over the coming year. Tom Jone

Question

5. An investment offers a 14 percent total return over the coming year. Tom Jones thinks the total real return on the investment will be only 9 percent. What does Tom believe the inflation rate will be over the next year? Do not round intermediate calculations and round your final answer to 2 decimal places. Stockade Corp. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. Investors require a return of 11 percent on the company's stock. What is the current stock price? What will the stock be in 3 years? What will the stock be in 15 years? Do not round intermediate calculations and round your final answer to 2 decimal places. 6.

Explanation / Answer

A real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. This method expresses the nominal rate of return in real terms, which keeps the purchasing power of a given level of capital constant over time.

Real rate of return = Nominal rate of return – inflation rate

  9 = 14 – Inflation rate

Inflation rate = 14 – 9

                         = 5%

So inflation rate is 5%

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