Problem 1 The Highfield Company is going through a period of fast growth. You want to know the current value of the stock price and have gathered the following information: Initial growth rate from year 3 to 7: Constant Dividend Growth Rate after year 7 Beta Market Return Risk-free rate Dividend in year 2: 10.0% 4.00% 1.09 7.00% 3.20% $2.00 1. What is the required rate of return of the equity issue? (5 Points) 2. What is the stock price one-year from now? (Hints: Be careful that dividend starts in year 2) (15 Points) 3. What is the current value of the stock? (10 Points) 4. What type of companies usually experience constant dividend growth and supernormal dividend growth rates2 (5 Points) Problem 2 The Drogon Co. just issued a dividend of $2.80 per share on its common stock. The company is expected to maintain a constant 4.5 percent growth rate in its dividends indefinitely. The stock sells for $58 a share. The company has a target debt-equity ratio of 0.55. Its cost of debt is 6 percent. 5. What is the company's cost of equity? (5 Points) 6. If the tax rate is 21 percent, what is the company's WACC? (5 Points) 7. What discount rate should we use in calculating total equity value and total firm value? (5 Points)