You are the CFO for an S&P 500 company. You are having discussions with your team about your firm's dividend policy. You can either disclose to investors that you will pay a dividend of $1.50 next year with the intention of maintain the same dividend payout for the foreseeable future. Or, you and your team are considering offering a dividend of $1.25 next year, but increasing this dividend payout by 5% each year in perpetuity. Assume is 12% required rate of return for your common stock.

a) What is the price of common stock today given the fixed dividend of $1.50/year beginning at the end of the year?

b) What is the price of common stock today if you were to pay a dividend of $1.25 at the end of the year, and increase by 5% every year thereafter?

Which option returns a higher expected price of your stock today?