Stock Valuation

a. The common stock of Water Town Mills pays an annual dividend of $2.00 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 10 percent annual return? [10 points]

b. How much are you willing to pay for one share of LBM stock if the company just paid a $2.00 annual dividend, the dividends increase by 5 percent annually, and you require an annual return of 15 percent from holding the LBM stock? [10 points]