Suppose that $D_0=$$$1\mathrm{.}00$ and the stock's last closing price is $$14\mathrm{.}71.$ It is expected that earnings and dividends will grow at a constant rate of

$g=3\mathrm{.}00\%$ per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is$,$ it is in equilibrium,

and the most appropriate required rate of return is $r_s=10\mathrm{.}00\%.$

The dividend received in period $1$ is $D_1=$$$1\mathrm{.}00(1+0\mathrm{.}0300)=$$$1\mathrm{.}03$ and the estimated intrinsic value in the same period is based on the

constant growth model: widehat$(P_1)=\frac{D_2}{r_x-g}.$

Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end each period.

The dividend yield for period $1$ is

and it will.

$\_$ each period.

The capital gain yield expected during period $1$ is

and it will

$\_-$ each period.

If it is forecasted that the total return equals $10\mathrm{.}00\%$ for the next $5$ years, what is the forecasted total return out to infinity?

$3\mathrm{.}00\%$

$7\mathrm{.}00\%$

$10\mathrm{.}00\%$

$13\mathrm{.}00\%$

Note that this stock is called a "Hold" as its forecasted intrinsic value is equal to its current price widehat$(P_0)=\frac{D_1}{r_2-g}=\frac{\text{\$}1\mathrm{.}03}{0\mathrm{.}1000-0\mathrm{.}0300}=$$$14\mathrm{.}71$ and the

expected total return is equal to the required rate of return $r_s.$ If the market was more optimistic and the growth rate would be $5\mathrm{.}00\%$ rather

than $3\mathrm{.}00\%,$ the stock's forecasted intrinsic value would be widehat$(P_0)=\frac{\text{\$}1\mathrm{.}03}{0\mathrm{.}1000-0\mathrm{.}0500}=$$$20\mathrm{.}60,$ which is greater than $$14\mathrm{.}71.$ In this case, you would

call the stock a "Buy".

Suppose that the growth rate is expected to be $2\mathrm{.}00\%.$ In this case, the stock's forecasted intrinsic value would be

its current

price, and the stock would be a