1. Suppose that a company is expected to pay a dividend per share of $20 per year forever. If investors require a 10% rate of return to invest in this stock, what is its price?
2. Suppose that a friend has started a business selling software. The software is a great hit, and the firm quickly grows large enough to be able to sell stock. Your friend's firm promises to pay a dividend of $5 per share every year for the next 50 years, at which point your friend intends to shut down the business.
The firm's stock is currently selling for $75 per share. If you believe that the company really will pay dividends as stated and if you require a 10% rate of return to make this investment, should you buy the stock? Briefly explain.