a. An equity is a claim to a stream of future dividends. Suppose that dividends grow at a constant rate g and are discounted at a constant rate r, with r>g. There is no uncertainty. The price of the equity is the present discounted value of this dividend stream. What is the price-dividend ratio?

b. what happens to the price-dividend ratio when there is a permanent increase in r? How about when there is a permanent increase in g? Briefly provide economic intuition for each.

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