Question 3: a) According to the general dividend valuation model, a firm that reinvests all its earnings and pays no cash dividends can still have a common stock value greater than zero. Explain how is this possible. (8 marks)

b) Simtek currently pays a $2.50 dividend (D0) per share. Next years dividend is expected to be $3 per share. After next year, dividends are expected to increase at a 9 percent annual rate for three years and a 6 percent annual rate thereafter. Calculate the current value of a share of Simtek stock to an investor who requires a 15 percent return on his or her investment. (12 marks)