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What do you expect would happen to stock prices

Problem: Stock prices and the risk premium

Suppose a share is expected to pay a dividend of $1,000 next year, and the real value of dividend payments is expected to increase by 3% per year forever.

a. What is the current price of the stock if the real interest rate is expected to remain constant at 5%? at 8%? Now suppose that people require a risk premium to hold stocks.

b. Redo the calculations in part (a) if the required risk premium is 8%.

c. Redo the calculations in part (a) if the required risk premium is 4%.

d. What do you expect would happen to stock prices if the risk premium decreased unexpectedly? Explain in words.

The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.

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