(ML&G) paid its stockholders an annual dividend of $1.50

a share. A major brokerage firm recently put out a report on ML&G predicting that the company's annual dividends should grow at the rate of 5% per year for each of the next seven years and then level off and grow at the rate of 3% a year thereafter.

(Note: Use four decimal places for all numbers in your intermediate calculations.)

a. Use the variable-growth DVM and a required rate of return of 8% to find the maximum price you should be willing to pay for this stock.

b. Redo the ML&G problem in part a, this time assuming that after year 7, dividends stop growing altogether (for year 8 and beyond,

g equals 0, g=0). Use all the other information given to find the stock's intrinsic value.

c. Contrast your two answers and comment on your findings. How important is growth to this valuation model?