Kindly Guide and solve only Q3.

Q1. Middling Growth Co. pays annual dividends on its common shares, and has just paid this year's dividend. It has just announced that it suffered a short-term earnings setback. It has been paying dividends that equal 50% of the previous year's earnings, and its earnings have been growing at 10% per year. This year's earnings were expected to be $10/share, and next year's dividend, to be received a year from today, was expected to be $5/share. The dividend for the year after that was expected to be $5.50 per share, and so on. In fact, Middling Growth announces that it earned only $8 this year. It expects to earn $10 next year, and to resume 10% growth thereafter. Nonetheless, it will pay a dividend of $5/share next year, and then resume paying dividends that grow at 10% per year. The expected dividend stream is: [G5]

Year	Expected Earnings Before Setback	Expected Dividend Before Earnings Setback	Expected Earnings After Setback	Expected Dividend after Earnings Setback
0	$10		$8
1	$11	$5.00	$10	$5.00
2	$12.10	$5.50	$11	$5.00
3	$13.31	$6.05	$12.10	$5.50
4 and thereafter	10% higher than previous year	10% higher than previous year	10% higher than previous year	10% higher than previous year

The risk-adjusted market rate of interest for Middling Growth shares is r = .12 (12%).

1. What price should Middling Growth shares sell for, immediately after the announcement of the short-term earnings setback?

Ans: 227.68

b. What percentage decline is this compared to the price that Middling Growth shares sold for before the announcement?

%age dec= 8.93%

Q2. Same facts as previous problem, except as stated below. Middling Growth's announcement of lower-than-expected earnings is, in your judgment, an early sign of a permanent decline in its earnings and dividend paying capacity. You believe that Middling Growth will still pay a dividend of $5 next year, but after that, it will cut its dividend to $3, after which its dividends will once again grow at 10% per year, from this reduced level. The expected dividend stream is: [G6]

Year	Expected Earnings Before Setback	Expected Dividend Before Earnings Setback	Expected Earnings After Setback	Expected Dividend after Earnings Setback
0	$10		$8
1	$11	$5.00	$6	$5.00
2	$12.10	$5.50	$6.60	$3.00
3	$13.31	$6.05	$7.26	$3.30
4 and thereafter	10% higher than previous year	10% higher than previous year	10% higher than previous year	10% higher than previous year

1. What price should Middling Growth shares sell for, immediately after the announcement of the earnings setback?

Ans: 138.39

2. What percentage decline is this compared to the price that Middling Growth shares sold for before the announcement?

%ge dec = 44.64%

Q3. Assume that it is uncertain, at the time that Middling Growth makes its earnings setback announcement, which scenario for future dividends, the one in the first Middling Growth problem above or the one in the second problem above, will turn out to be correct. You estimate that there is an 80% chance that the earnings setback will be short-term (the scenario in the first problem) and a 20% chance that the problem will be longer-term (the scenario in the second problem). [G7]

a. What are Middling Growth's expected future dividends, taking both possibilities into account, in each future year?

Year	Expected Dividend after Earnings Setback
1	$5.00
2
3
4 and thereafter

b. What is Middling Growth's expected stock price, immediately after the announcement of the earnings setback?

c. What percentage decline would be expected in Middling Growth's stock price, compared to the price that Middling Growth shares sold for before the announcement?