Stock Cs beta coefficient is bC 0.4, while Stock Ds is bD 0.5. (Stock Ds beta is negative, indicating that its return rises when returns on most other stocks fall. There are very few negative beta stocks, although collection agency stocks are sometimes cited as an example.)

a. If the risk-free rate is 7 percent and the expected rate of return on an average stock is 11 percent, what are the required rates of return on Stocks C and D?

b. For Stock C, suppose the current price, P0, is $25; the next expected dividend, D1, is $1.50; and the stocks expected constant growth rate is 4 percent. Is the stock in equilibrium?

Explain, and describe what would happen if the stock is not in equilibrium.