Suppose google is currently priced at $80 per share. It is expected to pay a dividend in one year of $7.00 per share. In addition, google has a beta of 1.5, the risk-free rate is 5%, and the market risk premium is 6%. The long-run expected growth rate of google is 4%.

a) Is google fairly priced? If not, would you buy it or sell it and why?

b) Suppose you buy 1,000 shares of google at $80 per share. You put up $40,000 and borrow the remainder. Your margin loan rate is 6%. One year later google pays a dividend of $2.55 and you sell your shares for $76. What is your rate of return on your investment?