a) Suppose a stock pays no dividend next period (period 1). In period 2, the stock pays an expected dividend of 2, which in subsequent periods is expected to grow at 5% a year forever. The risk-free rate is 1%, the equity premium is 4%, and the firm's beta is 2. According to the CAPM model and the efficient markets hypothesis, what is the price of the stock in period 0?
b) Suppose a stock's dividend is 2 this period. If the discount rate is. 1 and the expected growth of dividends is 3%, determine the dividend yield of the stock today. Explain clearly what a relatively low dividend yield predicts.