Question 1: An increase in a firm's expected growth rate would cause the firm's stock price to
a. Increase.
b. Decrease.
c. Fluctuate.
d. Remain constant.
e. Possibly increase, possibly decrease, or possibly remain unchanged.
Question 2: Stewart Industries expects to pay a $3.00 per share dividend on its common stock at the end of the year (D1 = $3.00). The dividend is expected to grow 25 percent a year until t = 3, after which time the dividend is expected to grow at a constant rate of 5 percent a year (i.e., D3 = $4.6875 and D4 = $4.9219). The stock's beta is 1.2, the risk-free rate of interest is 6 percent, and the rate of return on the market is 11 percent. What is the company's current stock price.