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The current price of stock A is $95.45 per share, and company A pays $5 per year in dividend. Assume that your required return is 10%.
1) Are you going to buy this stock if the price of the stock is expected to rise to $110 a year later?
2) What is the expected rate of return on this stock?
3) In the rational expectations model (efficient market hypothesis), why is the expected return on a stock the same as the optimal rate of return, which is in turn equal to the equilibrium rate of return of stock?
(Please show all your calculation process clearly in detail for all 3 parts, your answer should base on calculation result but not a personal judgement.)
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