You are considering buying shares in PC Corp. that pays annual dividends. Yesterday, the company paid a dividend of $2 per share and dividends are expected to grow at a constant annual rate of 3% indefinitely. The current stock price is $25 per share. PC Corp. has a beta of 1.2 and currently t-bill yields 4% annually. a) What is the rate of return required by the shareholders of PC Corp.? b) Assume the CAPM holds. What is the expected return of the market portfolio? What is the market risk premium? c) PC Corp. announces a change in its dividend policy. According to the new dividend policy, it will pay zero dividends during the next three years; then it will pay $2.06 per share in four years, and then the dividends will grow at 3% per year forever. What will be the new price of its stock after PC Corp. makes this announcement?

> 3) You are considering buying shares in PC Corp. that pays annual dividends. Yesterday, the company paid a dividend of $2 per share and dividends are expected to grow at a constant annual rate of 3% indefinitely. The current stock price is $25 per share. PC Corp. has a beta of 1.2 and currently t-bill yields 4% annually. a) What is the rate of return required by the shareholders of PC Corp.? a b) Assume the CAPM holds. What is the expected return of the market portfolio? What is the market risk premium? c) PC Corp. announces a change in its dividend policy. According to the new dividend policy, it will pay zero dividends during the next three years; then it will pay $2.06 per share in four years, and then the dividends will grow at 3% per year forever. What will be the new price of its stock after PC Corp. makes this announcement