Lifecycle Motorcycle Company (LMC) is expected to pay a dividend of $2.00 in year 1 andthe dividend grows at the rate of 5%. In addition, you know that Lifecycle Company hasa beta of 1.50 (relative to the market). Assume that the annual expectedmarket return is7.5% and the riskfree interest rate is 2.5%. Further, assumethat we live in a world where theCapital Asset Pricing Model (CAPM) holds and investors demand compensation for onlysystematic risk.1

1. What should be the current market price of a share of Lifecycle MotorcycleCompany? Please show all your calculations clearly.

2.How will the stock price of LMC change if the riskfree interest rate dropsto 0%? Compute the new stock price and show all your calculations clearly