2.1. Pakistan State Oil company (PSO) latest annual dividend of 1.25 a share was paid yesterday

and maintained its historic 7 percent annual rate of growth. You plan to purchase the stock

today because you believe that the dividend growth rate will increase to 8 percent for the

next three years and the selling price of the stock will be 40 per share at the end of that

time.

a) How much should you be willing to pay for the PSO stock if you require a 6 percent return?

b) What is the maximum price you should be willing to pay for the PSO stock if you believe

that the 8 percent growth rate can be maintained indefinitely and you require a 6 percent

return?

c) If the 8 percent rate of growth is achieved, what will the price be at the end of year 3,

assuming the conditions in Part b?