Question 2 Compute the required rate of return or the dividend growth rate.

(1) ABC just paid a dividend of $1.50, which is expected to grow indefinitely at 4%. If the current value of ABCs shares based on the constant-growth dividend discount model is $50, what is the required rate of return, k?

(2) Computer stocks currently provide an expected rate of return of 10%. MBC, a large computer company, will pay a year-end dividend of $1.5 per share. If the stock is selling at $75 per share, what must be the markets expectation of the growth rate of MBC dividends, g?