1) Saber issues stocks for equity financing.

a) The stock has a beta of 0.8. If the market index return is 7% and return on 3-month t-bills is 2%, what is the expected return on the stock according to Capital Asset Pricing Model?

b) Saber has announced that they will pay $3 dividend per share in year 1 and the dividends will grow at the rate of 6% per year until year 3. The market expects the price of the stock to be $45 at the end of year 3. Using the expected return you calculated in part (a), find the value (price) of each stock today.