Question 2 (6 marks) After careful analysis, you have determined that a firms dividends should grow at 2%, on average, in the foreseeable future. The firm dividend starts at $3. The required rate of return on equity is 10%. Suppose the current price of the stock is $20.56. (a) (1 mark) Assuming nothing changes, what is the price of the stock in three years? (b) (1 mark) Is the stock price overpriced or underpriced? Why? (c) (2 marks) Suppose after three years, dividends grow at a slower rate but constant of 1.8% for ever. Would you expect an increase or decrease in the required return? Compute the new required return. d) (2 marks) Suppose the Fed make an open market purchase ($50 million) and First National Bank uses all proceeds from the Fed to make more loans. Draw T-account changes to First National Bank's balance sheet in three stages i.e. 1st the purchase, and the loan, 3rd after the proceeds from the loan are spent by the borrower. Question 2 (6 marks) After careful analysis, you have determined that a firms dividends should grow at 2%, on average, in the foreseeable future. The firm dividend starts at $3. The required rate of return on equity is 10%. Suppose the current price of the stock is $20.56. (a) (1 mark) Assuming nothing changes, what is the price of the stock in three years? (b) (1 mark) Is the stock price overpriced or underpriced? Why? (c) (2 marks) Suppose after three years, dividends grow at a slower rate but constant of 1.8% for ever. Would you expect an increase or decrease in the required return? Compute the new required return. d) (2 marks) Suppose the Fed make an open market purchase ($50 million) and First National Bank uses all proceeds from the Fed to make more loans. Draw T-account changes to First National Bank's balance sheet in three stages i.e. 1st the purchase, and the loan, 3rd after the proceeds from the loan are spent by the borrower