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The last dividend that was paid yesterday (D0) on a Corporation's common stock was $8.00, and the expected growth rate is 0 percent. The required rate of return on this stock is 10 percent.
Question 1. What is the present value of the future growth opportunity represented by the 5% growth rate, compared to 0% growth rate?
Question 2. What is the highest price you should be willing to pay for this stock?
Question 3. Suppose the firm's expected growth rate is 5% now, what is the price of the stock?
Assume that the other information remains the same as before,
i.e., D0 = $8; ks = 10%.
Question 4. Assume the constant growth rate is 5%. What is the stock price at time 1, i.e., one year from today? Assume that the other information remains the same as before,
i.e., D0 = $8; ks = 10%.