A stock's current annual dividend is $1 per share and its beta is 1.0 It is currently traded at $55 per share. Assume that CAPM is true, the risk-free rate is 3% and the market risk Premium is 6%
(a) Suppose future expected return and expected dividend growth are both constant forever into the future. What does that market expect the perpetual average growth rate for this stock to be?
(b) Imagine that the company is able to cut their production cost by applying a new technology, so this stock's dividend are expected to grow at an annual rate of 8% after the good news is announced. Assume beta remains at 1.0. Find the new price of the stock and the expected return of the stock at the new price?