1. KSI, a large energy company, will pay a $2.00 per share dividend at year-end. It is currently trading at $50 per share. Suppose energy stocks have a 16% expected rate of return.

a. What is the market's expectation of the growth rate of KSI's dividends?

b. Suppose dividend growth forecasts for KSI are revised down to 5% per year. What will happen to the price of KSI's stock? [Hint: You need to compute D0 using the numbers in part a first.]

2. Blue Sky's dividends per share are expected to grow at 5% a year indefinitely. Using the dividend discount model, if the required rate of return is 10% per year and Blue Sky's expected dividend at the end of this year is $8.00, at what price should a share of Blue Sky trade?