Lifecycle Motorcycle Company (LMC) is expected to pay a dividend of $2.00 in year 1 and the dividend grows at the rate of 5%. In addition, you know that Lifecycle Company has a beta of 1.50 (relative to the market). Assume that the annual expected market return is 7.5% and the riskfree interest rate is 2.5%. Further, assume that we live in a world where the Capital Asset Pricing Model (CAPM) holds and investors demand compensation for only systematic risk.

1. (15 points) What should be the current market price of a share of Lifecycle Motorcycle Company? Please show all your calculations clearly.

2. (10 points) How will the stock price of LMC change if the riskfree interest rate drops to 0%? Compute the new stock price and show all your calculations clearly.