Question 2:

The common stockholders of Skyline Resorts have just received a dividend of $0.18 per share. Due to Skyline Resorts relatively low beta, investors currently require a rate of return equal to 11% on common stock investments of this perceived risk level.

1. Assuming the market expects dividends of Skyline Resorts to grow at a constant rate of 5% into perpetuity, what is the maximum price you would be willing to pay for this stock today?
2. If you now believe the current dividend of $0.18 is expected to grow at an annual rate of 9% for each of the following 3 years and 5% per year thereafter, what is the maximum price you would be willing to pay for this stock today?
3. Briefly explain reasons as to why the valuation of common stocks is more difficult than the valuation of fixed income securities (such as bonds and preferred stocks).