Suppose common shares of IBM are trading at $144.70 per share. Company historical divided yield is 4.55 percent per annum based on expected future price at the end of 12 months period from today. Company share price a year ago was $125.50.

a) Assume that over the next 12 months, the share price is expected to grow at the same rate as in prior 12 months. What is the price investors will be willing to pay for this stock today, if the discount rate is 5 percent per annum? Is the stock over- or under-valued at $144.70?

b) Now, suppose discount rate that applies to equity markets rises to 7.5 percent. Is the IBM stock over- or under-valued at $144.70?

c) What is the rate of return to be earned from IBM stock in (a) and (b) above?