Emerald City Enterprise (ECE) is a fast-growing public company. Its most recent dividend payment is $2 per share. Security analysts are predicting that the company will increase its dividend by 8 percent next year and then will reduce the dividend growth rate by 2 percentage points per year until it reaches the industry average of 2 percent, after which the company will keep the 2 percent constant growth rate, forever. ECEs stock beta is 1.2. The return of the market portfolio is 7% and the risk-free rate is 3%.

a) Based on the Capital Asset Pricing Model, what should be the expected return of the stock of ECE?

b) What is ECEs stock worth today according to the dividend discount model? In your calculation, use your result from part a) as the cost of equity capital, RE.