Q1. Prosperity, a fund manager, wishes to estimate the expected return on a stock, Imagination. The analyst at Prosperity thinks that Imagination will have the following payout ratios (the proportion of earnings paid as dividends) and earnings per share: Year 1 2 3 Payout Earnings Ratio Per Share 0.05 1 0.10 1.5 0.20 2.5 The dividends of Imagination are paid at the end of each year. Suppose that after year 3, Prosperity's investment model projects that Imagination is capable of producing a 10% growth rate in earnings in perpetuity. The analyst also assumes that the payout ratio after year 3 will remain at 20% in perpetuity. The analyst runs a regression of Imagination's historical monthly stock excess return (over the 1-month T-Bill rate) against the excess returns of the S&P500, and gets a regression coefficient of 1.75. For the next year, the Bloomberg consensus estimate for the S&P500 return is 8%, and the 1-month T-Bill is currently at 2%. a) What is the implied expected return of the stock? Please show your work (3 points) b) What is the price of the stock? Please show your work (6 points)