If the Nominal Rate Is 5

question 135

Multiple Choice

If the nominal rate is 5.5%, and the real rate is 1.5%, determine the inflation rate.

• A) 4.85%
• B) 3.94%
• C) 4.03%
• D) 5.12%
• E) 6.21%

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Definitions:

Constant-Growth DDM

A valuation method that estimates the value of a stock by using its expected dividends, which grow at a constant rate indefinitely.

Intrinsic Value

The actual, inherent value of an asset, without respect to market value or external factors.

Market Capitalization Rate

A rate that represents the return expected by investors on a security or a portfolio, typically reflective of the risk and growth prospects.

Earnings Retention Ratio

The earnings retention ratio, also known as the plowback ratio, measures the percentage of net earnings a company retains to reinvest in the business, as opposed to distributing to shareholders as dividends.