Slowtrac, Inc. will be initiating a dividend for the first time, and will be paying it tomorrow. It is expected that the dividend cash flow will be $1.25/share. Over the next 2 years, the consensus is that Slowtrac will increase the dividend by 5% per year. Following the two year growth, the dividend is then expected to grow at 2% per year in perpetuity.Additional information on Slowtrac and the financial markets: Beta of Slowtrac is 0.75 Expected market risk premium is 6% per year Risk-Free rate is 2% per year

a) Value a share of Slowtrac.

b) If the risk-free interest rate increases to 3% per year, and assuming everything else (and specifically Slowtracs expected cash flows, Slowtracs beta and the market risk premium) are unchanged, calculate what you think a share of Slowtrac would be.

Consider another firm, Ziptrac, trading in the same market as Slowtrac. Ziptrac has an expected dividend one year from now of $4.00 per share. This dividend is expected to grow at 3% per year in perpetuity. Ziptracs beta is also 0.75

c) Value a share of Ziptrac if the riskless interest rate is 2% per year; and also value it after the riskless interest rate increases to 3% per year.

d) Which company, if any, has a value that is more sensitive to a change in the riskless interest rate? Why do you think this is so?