On December 31, 2016,Mr. Gruber purchased 100 shares of company ABC for $127.00 per share. Starting in 2017, company ABC pays an annual dividend at the end of each year. The dividend on December 31, 2017 will be $2.54 per share, and will be increased by 2% in every subsequent year.
(a) Assuming that Mr. Gruber paid a fair price for his shares, what is the current effective annual interest rate?
(b) On December 31, 2018, the effective annual interest rate declines to 3%. What will the fair price per share for ABC be (after the dividend for 2018 has been paid)?[Hint:Observe that the amount of the dividend has increased]