Stock A has just distributed a dividend of $5. It is expected that the company will increase its dividend by 0% in the coming year, 10% in the second and third years and 7% in the fourth year. Starting from Year 5, Company A is forecast to maintain the dividend growth rate at 5% forever.

a) If you are going to buy Stock A at the beginning of Year 4 (= End of Year 3), how much should you pay if Stock As prevailing yearly required rate of return at that time is expected to be 8%? (3 marks)

b) How much should you pay for Stock A today if its required rate of return is 8%? (6 marks)

c) Suppose you are going to buy Stock A today and hold it for one year. Estimate the following yields:

i) Dividend Yield (2 marks)

ii) 1-year capital gains yield (6 marks)

iii) 1-year total yield (HPY1-year) (2 marks)

d) Using the following formula to confirm 1-year total yield calculated in (ciii): P0(1 + HPY1-year) = D1 + P1 (3 marks)

e) Continued with (a). Suppose you paid $200 to buy Stock A at the beginning of Year 4. Estimate the (long- term) average yearly overall rate of return from Stock A investment. [Hint: Stock A is a constant dividend-growth stock.] (3 marks)