1. Shares in Company A are currently trading in the market at a price of $16.23. Market analysts expect the next dividend per share (to be paid one year from today) is $1.45 and that the return on equity for Company A's stock should be 13.5%.

a. What does the market expect Company A's stock to be trading at one year from today?

b. Suppose that you agree with the market on everything except the required return on equity. In particular, you think company A's stock is riskier and you would expect a return of 15%. What position should you take? Justify your answer.

c. Now suppose the company is running into some trouble and analysts downgrade the expected dividend to $1.30 - a one-time change. What would you expect

to happen to the current market price of Company A's stock? Justify your answer.

2. You observe that Australian bonds have a yield that is 166 basis points higher than similar Government of Canada bonds. A friend of yours says that it makes no sense to buy Canadian bonds since they offer a lower yield. Discuss whether or not your friend's claim is correct.