1. King Waterbeds has an annual cash dividend policy that raises the dividend each year by 4%. Last year's dividend was $0.40 per share. What is the price of this stock if an investor wants a 5% return? 2. Staton-Smith Software is a new up-start company and will not pay dividends for the first five years of operation. It will then institute an annual cash dividend policy of $2.50 with a constant growth rate of 5% with the first dividend at the end of year six. What is the price of this stock if an investor wants a 10% return? 3. Suppose that the consensus forecast of security analysts of your favorite company is that earnings next year will be El = $5.00 per share. Suppose that the company tends to plowback 50% of its earnings and pay the rest as dividends. If the Chief Financial Officer (CFO) estimates that the company's growth rate will be 8% from now onwards, answer the following questions. 3.1 If your estimate of the company's required rate of return on its stock is 10%, what is the equilibrium price of the stock? 3.2 Suppose you observe that the stock is selling for $50.00 per share, and that this is the best estimate of its equilibrium price. What would you conclude about either (i) your estimate of the stock's required rate of return; or (ii) the CFO's estimate of the company's future growth rate? 3.3 Suppose your own 10% estimate of the stock's required rate of return is shared by the rest of the market. What does the market price of $50.00 per share imply about the market's estimate of the company's growth rate? 4. Consider a bond paying a coupon rate of 8% per year annually when the market interest rate is 6% per year. The bond has six years until maturity and its par value is $1000. What are the bond's price today (PO), its price 1 year from now after the next coupon is paid (Pl), and its holding period return (r) over the 1-year period? Assume market interest rate stays the same after 1 year