1. What should the price of the following stocks be? In each case, the OCC is 10%.

(a) Expected dividend in one year is $5 and is constant forever.

(b) Expected dividend in one year is $5 and grows at 2% forever.

(c) Expected dividend in one year is $5, in two years $4, in three years $2.5, and grows at 2% forever after.

(d) Dividend just paid is $5 and is expected to grow at 2% forever.

2. A company had net income of $20,000 this year on equity of $100,000 last year. Its ROE is expected to be constant. Answer the following questions:

(a) What is its ROE?

(b) The company retains 40% of its earnings. What are earnings next year expected to be? What are dividends next year expected to be?

(c) What is the growth rate of earnings? What is the growth rate of dividends?

(d) The beta of the returns on the stock has been 1. The risk-free rate is 5% and the return on the market is expected to be 10%. What is the discount rate (OCC) on the company’s stock?

(e) The company has 20,000 shares outstanding. What should the price per share be today?