1. (20 points) The following information is given for a stock. Investors assume that the return of the stock is best explained by a two-factor model that includes the market factor and a second risk factor. Using a dividend discount model, what is the price for this stock? Stock covariance with the market=0.5 Market variance = 0.25 Stock covariance with a second risk factor=0.6 Variance of the second factor=0.3 Market Premium:3% Second factor risk premium=1% Risk free rate=2 % Current earnings per share= $5. The ROE is expected to shrink (decrease at the rate 10% for first 5 years The ROE is expected to grow at the rate 8% forever after the first 5 years Payout for the first 5 years: 50% Payout after 5 years: 50%