Question 2 (20 points) (a) [10 points] XYZ Corporation just paid dividends of $1.5 per share. Assume that over the next three years, dividends will grow as follows, 5% during next year, 15% during year 2 and 25% during year 3.

After that, the growth is expected to maintain at a constant growth rate of 10% per year. The required rate of return is 15% per year.

Calculate the theoretical stock price by the multistage dividend growth Dividend Discount Model.

(b) [10 points] The current dividend yield on Clayton's Metals common stock is 2.5%. The company just paid a $1.48 annual dividend and announced that it plans to pay $1.54 next year. The Dividend Growth Rate g is expected to remain constant at the current level.

What is the required rate of return on this stock?

[Hints: Dividend Growth Rate g is defined as: g = (D1 - D0) / D0]