Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to _____ if Fred is to achieve his 10% rate of return.

A) remain constant
B) decrease by 5%
C) increase by 5%
D) increase by 10%
E) increase by 15%

To calculate the rate of return, we need to consider the dividend and the change in the stock price. Let's assume that Fred purchased 100 shares of ABC stock for $20, which gave him a total investment of $2000. The annual dividend per share is $1, so the total dividend received by Fred is $100 (100 shares x $1 per share).

To achieve a 10% rate of return, Fred needs to earn an additional $100 in capital gains. This means that the value of his investment needs to increase by $100. Since Fred purchased the stock at $20 per share, the total value of his investment is also $2000 (100 shares x $20 per share).

To increase the investment value by $100, we need to calculate the percentage change in the stock price. Let's denote the new stock price as x. We can set up the following equation:

$2000 + $100 = $2000(x)

Solving for x, we obtain:

x = $2100/$2000
x = 1.05

This means that the stock price needs to increase by 5% in order for Fred to achieve his desired rate of return. Therefore, the correct answer is C) increase by 5%.