Question 3: Consider a company which just paid a dividend D0 (paid today at time 0) of $2.00 per share of common stock. Due to a variety of economic circumstances, this company expects to experience growth rates of 8% and 10% over the next two years. After that the company expects the growth rate to be 6% indefinitely. If the company faces an equity discount rate of 10% throughout, answer the following:

a) What is the value of a share of common stock P0 today (at time 0)?

b) What would you expect the price to be at time 1? (Assume that the dividend at time 2 has already been paid)

c) What are the expected capital gain yield and dividend for the first period?