1) You are analyzing the common stock of Sagarmatha Corporation for investment purpose. It is estimated that Sagarmatha will pay a dividend on its stock of Rs.5 per share this year. The dividend is expected to remain the same the following year, then increasing to Rs.7 the year after. From that point on, the dividend is expected to grow at 4% per year indefinitely. Stocks of other companies of the same industry with similar risk are currently priced to provide a 10% expected return. Based on the intrinsic value of the stock, would you invest on the stocks of Sagarmatha Corporation if they are selling at Rs.100 per share in the market?

2. Consider two 2-year bond strategies. The first strategy entails buying the Rs. 1,000 face value 2-year zero bond offering a 2-year yield of maturity of 10 percent, and holding it until maturity. The alternative strategies entails investing the same amount in a 1-year zero-coupon bond with a yield to maturity of 9 percent, and when the bond matures, reinvest the proceeds in another 1-year bond. If expectations theory holds true, what will be the interest rate that 1-year bonds will offer next year?

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