DDM1: The MBS Corporations dividends per share are expected to grow indefinitely by 4% per year.

• DDM1-a:If this year-end dividend is $7 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM?
• DDM1-b: If the expected earnings per share are 11$, what is the implied value of the ROE on future investment opportunities?
• DDM1-c: How much is the market paying per share for growth opportunities (i.e., for an ROE on future investments that exceeds the market capitalization rate)?

DDM2: The stock of Nogo Corporation is currently selling for $20 per share. Earnings per share in the coming year are expected to be $4. The company has a policy of paying out 50% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20% rate of return per year. This situation is expected to continue indefinitely.

• DD2-a:Assuming the current market price of the stock reflects its intrinsic value as computed using the constant-growth DDM, what rate of return do Nogos investors require?
• DD2-b:By how much does its value exceed what it would be if all earnings were paid as dividends and nothing were reinvested?
• DD2-c: If Nogo were to cut its dividend payout ratio to 25%, what would happen to its stock price? What if Nogo eliminated the dividend?