Shelly Hampden is a young executive who wants to invest for capital growth. Her required rate of return is 15%. She has been considering the following two issues:

Stock 1:Dividends are currently $2.00 annually and are expected to increase by 10% annually; the market price is $40.

Stock 2:Dividends are currently $2.50 annually and are expected to increase by 8% annually; the market price is $45.

1. According to the dividend valuation method, is Stock 1 currently overvalued or undervalued for Shelly?
2. Does Stock 1 meet Shelly's required rate of return?
3. According to the dividend valuation method, is Stock 2 currently overvalued or undervalued for Shelly?
4. Does Stock 2 meet Shelly's required rate of return?
5. Which stock is more appropriate for Shelly?
6. If Shelly's required rate of return should decrease to 14%, would you make the same selection? (Think about why)