Assume the risk-free rate is 6 percent and the market risk premium is 6 percent. The stock of Physicians Care Network (PCN) has a beta of 1.5. The last dividend paid by PCN (D0) was $2 per share.

a. (Using Excel and viewable formulas) What would PCN's stock value be if the dividend was expected to grow at a constant -5 percent? 0%? 5%? Hint: First, use the SML of the CAPM to show that the stock's required rate of return is 15%.

b. (Using Excel and viewable formulas) What would be the stock value if the growth rate is 10 percent, but PCN's beta falls to 1.0? 0.5?