Problem:

Barnard Corp. will pay a dividend of $3.05 next year. The company has stated that it will maintain a constant growth rate of 5 percent a year forever.

Required:

Quesiton: If you want a 15 percent rate of return, how much will you pay for the stock? What if you want a 10 percent rate of return? What does this tell you about the relationship between the required return and the stock price?

Note: Provide support for your underlying principle.