This year, Midland Light and Gas (ML&G) paid its stockholders an annual dividend of $2.00 a share. A major brokerage firm recently put out a report on ML&G predicting that the company's annual dividends should grow at the rate of 5% per year for each of the next seven years and then level off and grow at the rate of 4% a year thereafter. (Note: Use four decimal places for all numbers in your intermediate calculations.)

a. Use the variable-growth DVM and a required rate of return of 11.00% to find the maximum price you should be willing to pay for this stock.

b. Redo the ML&G problem in part a, this time assuming that after year 7, dividends stop growing altogether (for year 8 and beyond, g=0). Use all the other information given to find the stock's intrinsic value.

c. Contrast your two answers and comment on your findings. How important is growth to this valuation model?

a. Using the variable-growth DVM and a required rate of return of 11.00%, the maximum price you should be willing to pay for the stock is $ . (Round to the nearest cent.)

b. The stock's intrinsic value when there is no growth after year 7 is $ ( ). (Round to the nearest cent.)

c. Contrast your two answers and comment on your findings. How important is growth to this valuation model?(Select from the drop-down menus.)

From the results above, we can conclude that the dividend valuation model is very sensitive to the growth rate in dividends and the duration of dividend payments; the higher the rate of growth in dividends, the (lower /higher ) the intrinsic value of the stock. The longer dividends are expected to be paid, the (lower /higher ) the intrinsic value of the stock.