Company Z is expected to pay a dividend of $10.00 per share next year (out of earnings of $15 per share). Assume that the required rate of return on the stock is 8% and dividends are growing at a current rate of 5% per year.

a) What is the current stock price? b) Calculate the present value of stock if the company would pay all of its earnings as dividends, i.e. $15, next year? (Hint: Remember that growth rate changes to ?)

c) Calculate the present value of the growth opportunity for stock (PVGO) (Hint: It is the difference between two prices in a and b).