Throughout this problem assume that all cash flows are realized at the end of any given period. All periods are one year long. The risk free interest rate is 6% per year, while the cost of equity is 7% per year for all companies under consideration. Company A will make a dividend payment of $10 in one year, which will then grow at a rate of 1% per year for ever after.

a) Use the dividend discount model to calculate the current stock price for company A.

Company B has a dividend policy that amounts to a 10-year annuity with the first dividend payment one year from now.

b) For which yearly dividend payment is the stock price of company B equal to the stock price of company A?

The stock price for company C is described by the binomial model. Company Cs current stock price is $300, and company C does not make any dividend payments. Next year, the stock price of company C can either increase by 20% or decrease by 10%. A put option with an exercise price of $310 is traded on the stock of company C.

c) i) What are the possible stock prices of company C next year? ii) What are the possible payoffs for the put option next year?