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5. (20 points) Consider that you hold a stock that pays dividend of $5 in boom years and $2 in recession years. Required rate of
5. (20 points) Consider that you hold a stock that pays dividend of $5 in boom years and $2 in recession years. Required rate of return is 10%. Assume that the economy behaves cyclically, and each boom year is followed by a recession year. Last recession has just finished.
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(a) (10 points) What should the market price be? Hint: consider PVs of boom and recession dividends separately.
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(b) (10 points) What if each boom is longer and lasts for two years?
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