YYZ is a publicly traded company. YYZ just paid out a dividend of D0=$5 per share this year (t=0). The company has committed to a dividend payout ratio of 20% and retains 80% of its total earning for re-investments. Analysts believe the company is delivering a return on equity (ROE) of 15%. The stock is traded around P0=$27 per share today.

a. What is a reasonable estimate of YYZs dividend growth rate g?

b. What is D1, the expected dividend in year 1?

c. Based on your own research analysis, the true expected return on YYZs stock should be around E(rcs) = 24%.

i. What is the true value of the common stock according to your analysis?

ii. Should you buy or sell (short) YYZs share if you believe in your modeling? Explain