Q No 2: A) Investors require a 15% rate of return on Levine Companys stock (that is, rs = 15%). a. What is its value if the previous dividend was D0 = $2 and investors expect dividends to grow at a constant annual rate of (1) 5%, (2) 0%, (3) 5%, or (4) 10%? b. Using data from Part a, what would the Gordon (constant growth) model value be if the required rate of return was 15% and the expected growth rate was (1) 15% or (2) 20%? Are these reasonable results? Explain. c. Is it reasonable to think that a constant growth stock could have g > rs? Explain.

B). Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $1.00 coming 3 years from today. The dividend should grow rapidlyat a rate of 50% per yearduring Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required return on Microtech is 15%, what is the value of the stock today?