The National Motor Company's last dividend was $1.25 and the directors expect to maintain the historic 4% annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase to 7% for the next three years and the stock will reach $25 per share.
a. How much should you be willing to pay for the stock if you require 16% return?
b. How much should you be willing to pay for the stock if you feel that the 7% growth rate can be maintained indefinitely and you require a 16% return.