Problem 2.

Air Canada Corporations common stock has a current market value or price of $40 and it is known that the company will pay a dividend of $8.00 per common stock next year. The firm plans to increase this dividend amount at an average rate of 5% per year in the following years indefinitely.

Required:

1. What would be the expected return on Air Canadas common stock? (10 Points)
2. What are the specific components of the expected return? What are they called? Please name and explain them.(10 Points)