Problem: Two investors are evaluating GE's stock for possible purchase. They agree on the expected value of D1 and on the expected future growth rate. Further, they agree on the riskiness of the stock. However, one investor normally holds stock for 2 years, while the other holds stock for 10 years. Should they both be willing to pay the same price for GE's stock? Explain.
Assume the risk-free rate increases. What impact would this have on the cost of debt? What impact would it have a cost of equity?