Question: (17.7) A stock is expected to pay a dividend of $3.00 each year forever. You assess that the expected return is 10% and from this

(17.7) A stock is expected to pay a dividend of $3.00 each year forever. You assess that the expected return is 10% and from this you conclude that the fair price should be $30. But you know that stock prices sometimes deviate from fair value by significant amounts. When those deviations occur, you believe that prices do revert back to fair value, but not immediately. You calculate that one quarter the discrepancy between the current price and the fundamental price is closed each year. If the current price is $22, what do you calculate the expected return on the stock will be over each of the next five years?

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