Suppose that D0=$1.00 and the stocks last closing price is $21.80. It is expected that earnings and dividends will grow at a constant rate of g=9.00%=9.00% per year and that the stocks price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium, and the most appropriate required rate of return is rs=14.00%.

The dividend received in period 1 is D1=$1.00(1+0.0900)=$1.09 and the estimated intrinsic value in the same period is based on the constant growth model: P1=D2rsg1^=2.

Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period.

Period	Dividend	Price	PV of dividend at 14.00%
	(Dollars)	(Dollars)	(Dollars)
0	$1.00	$21.80
1	1.09	23.80
2
3
4
5

The dividend yield for period 1 is and it will each period.

The capital gain yield expected during period 1 is and it will each period.

If it is forecasted that the total return equals 14.00% for the next 5 years, what is the forecasted total return out to infinity?

5.00%

9.00%

14.00%

23.00%

Note that this stock is called a Hold as its forecasted intrinsic value is equal to its current price P0=D1rsg=$1.090.14000.0900=$21.800^=1=$1.090.14000.0900=$21.80 and the expected total return is equal to the required rate of return rs. If the market was more pessimistic and the growth rate would be 8.00% rather than 9.00%, the stocks forecasted intrinsic value would be P0=$1.090.14000.0800=$18.170^=$1.090.14000.0800=$18.17, which is less than $21.80. In this case, you would call the stock a Sell.

Suppose that the growth rate is expected to be 10.00%. In this case, the stocks forecasted intrinsic value would be ___ its current price, and the stock would be a ___ .