You have just completed an analysis of Rodriguez Manufacturing. You used the Capital Asset Pricing Model to determine that the required rate of return is 13%.

The last dividend paid was $1.80, and the current price is $25. Based on new manufacturing processes that the company recently adopted and the companys history of consistently paying dividends, you believe the companys dividends will grow at a constant growth rate of 6%.

a) What is the expected rate of return of Rodriguez Manufacturings stock?

b) Based on your analysis, which of the following statements is true?

1)The stock is experiencing supernormal growth

2)The stock is in equilibrium

3)The stock is probably a good buy because it is undervalued

4)The stock is not a good buy because it is overvalued

5)The dividend is too low

c) Now consider a different scenario. If Rodriguez dividend grows 15% for a year, 10% in year 2, and 6% a year thereafter, what is the expected price today, P₀?