(3) Suppose one share of Google stock will earn

$5 in one year

$8 in the second year

$10 in the third year

The interest rate i = .05. What is the present value of the three-year stream of payments?

(4) Suppose one share of Company A pays out $10 per year and will do so forever. The interest rate is .04.

1. a) What is the present value of this earnings stream? What is the P/E (price to current earnings) ratio?
2. B) Suppose although it has been paying $10 per year, unexpectedly its earnings rise to $11 per year forever. What is its new share price?
3. C) Suppose the unexpected rise to $11 is only for the first year, after which its earnings revert to $10 per year forever. What is its share price now, at the beginning of the first year? What is its share price at the beginning of the next year?

(5) Suppose you win the lottery. You have a choice between receiving $50,000 per year forever (assume you live forever, or can pass on the annual payment) or one immediate payment of $1,200,000.

1. a) which should you choose if the interest rate is 3%? If it is 6%?
2. b) for what range of interest rates should you take the immediate payment?

(6) The interest rate is 5%. Company G=s stock pays annual dividends that start at $10 next year and then grows by 2% every year thereafter, forever.

1. a) What should be the price of G=s stock? What is the P/E ratio?
2. b) What should its price be if dividends grow at 3% per year? What is the P/E ratio then?