5. Assume D₁ = $1.60, K_e = 13 percent, g = 8 percent. Using Formula 75 on page 168, for the constant growth dividend valuation model, compute P₀.

6. Using the data from problem 5:

a. If D₁ and K_e remain the same, but g goes up to 9 percent, what will the new stock price be? Briefly explain the reason for the change.

b. If D₁ and g retain their original value ($1.60 and 8 percent), but K_e goes up to 15 percent, what will the new stock price be? Briefly explain the reason for the change.

7. Using the original data from problem 5, find P₀ by following the steps described.

a. Project dividends for years 1 through 3 (the first year is already given). Round all values that you compute to two places to the right of the decimal point throughout this problem.

b. Find the present value of the dividends in part a using a 13 percent discount rate.

c. Project the dividend for the fourth year (D₄).

d. Use Formula 75 on page 168 to find the value of all future dividends, beginning with the fourth years dividend. The value you find will be at the end of the third year (the equivalent of the beginning of the fourth year).

e. Discount back the value found in part d for three years at 13 percent.

f. Observe that in part b you determined the percent value of dividends for the first three years and, in part e, the present value of an infinite stream after the first three years. Now add these together to get the total present value of the stock.

g. Compare your answers in part f to your answer to problem 5. There may be a slight 5 to 10 cent difference due to rounding. Comment on the relationship between following the procedures in problem 5 and problem 7.