Assume the following information for an infinitely lived asset: a constant interest rate of 5% p.a.; a dividend of $10, growing at a constant rate of 3% p.a.

Q1 Applying a dividend growth model methodology, calculate the price of the asset to the nearest whole dollar

Q2

If the rate of interest falls to 3% p.a., all other information remaining the same, what is the effect on the price of the asset?

A The price rises exponentially;

B The net present value cannot be determined as the model requires that the interest rate is above 2%

C The price rises but at a rate lower than the interest rate less the growth rate;

D The net present value is undefined since the rate of interest equals the rate of growth