R. E. Lee recently took his company public through an initial public offering. He is expanding the business

quickly to take advantage of an otherwise unexploited market. Growth for his company is expected to be 45

percent for the first three years and then he expects the growth to be 20 percent for the next two years. He

then expects the growth to slow down to a constant 10 percent. The most recent dividend (D

0

) was $0.75.

Investors require a 18 percent return on Lee's stock. What is the current price of Lee's stock?

2.B: A share of perpetual preferred stock pays an annual dividend of $13.00 per share. If investors require a

13.50 percent rate of return, what should be the price of the preferred stock?

2.C.

Assume that you are considering the purchase of a 20-year, bond with an annual coupon rate of 9.3%.

The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 8.4%

nominal yield to maturity on this investment, what is the maximum price you should be willing to pay

for the bond?