PROBLEM 1

Assume the risk-free rate is 6 percent and the market risk premium is 6 percent. The stock ofCigna (CI) has a beta of 1.5. The last dividend paid by Cigna (D0) was $2 per share.

a. What would Cigna's stock value be if the dividend was expected to grow at a constant -5 percent?0 percent? 5 percent? 10 percent?

b. What would be the stock value if the growth rate is 10 percent, but Cigna's beta falls to 1.0? 0.5?

PROBLEM 2

Zimmer Holdings (ZMH), has maintained a dividend payment of $4 per share for many years. The same dollar dividend is expected to be paid in future years. If investors require a 12 percent rate of return on investments of similar risk, determine the value of the company's stock.