1. Suppose Facebook Inc. does not currently pay a dividend. Analysts project that they will begin paying dividends in 5 years. The first annual dividend will be $5 and then the dividend is predicted to grow at 5% per year. Investors require a 10% rate of return. What is the value of one share of Facebook stock under these assumptions?

2. How should we interpret a firm with P/E of 80? Suppose this is high compared to the firms industry why should we invest in this firm?

For every dollar of earnings we...