Capital Group is expected to pay the following dividends over the next four years: $15, $12, $10, and $8. Subsequently, the company pledges to maintain a constant 5% growth rate in dividends forever. If the required return on the stock is 12%, what is the share price today?

What is the expected share price after one year? (40 marks)

(b) A 10-year annual corporate bond is rated as AAA. The par value is $1000 and the coupon rate is 8%. Suppose the YTM of a typical AAA rated bond is 6% annually compounded, what is the fair price of this bond? (20 marks)

(c) A firm announces that it will increase its dividend. How would the stock price react to this news? Discuss your answer critically.