2. A tech company has just reported an earnings of $3/share and declared no dividend. An

analyst predicts that the company will have a return on equity of 403 and pay no dividend

for the next three years. He forecasts that the company will have a return on equity of 303

starting from the 4th year and until the end of 6th years and will pay out 603 its earnings

during this period. The analyst also predicts that the company will become mature and

generate a return on equity of 203 and pay out 80% of its earnings forever after 6th year.

(a) What are the dividends in the first seven years predicted by the analyst? (7 marks)

(b) The analyst also estimates that the company's stock has a beta of 2.0. Suppose the

expected market return is 12.53 and risk free-rate is 53. What is the appropriate discount

rate of this stock according to the CAPM? Using the discount rate, calculate the price of

stock according to the analyst's prediction and dividend discount model (DDM). (8 marks)