Consider the Dividend Discount Model (DDM) for pricing equity.

i. Suppose a firm is expected to pay a dividend of $2.50 at the end of the next year and its share price in one year is expected to be either $25 or $50, each with 50% probability. If the market believes the required return on this equity is 10% per year, determine the share price today using the DDM.

ii. Suppose you thought you could model the firm as paying a dividend forever. You still think the dividend nest year will be $2.50. If you expect the dividends to grow into the future at 4% per year forever, determine the price of the stock today based upon the growing perpetuity version of the DDM.

iii. Identify 4 economic factors/variables that the DDM model say are responsible for changes in stock prices according to the growing perpetuity version of the model. (Assume rE is determined by the CAPM as rF + premium for risk)