Economics 173B Summer 2009 Problem Set #2 Write your solutions clearly and show at least three steps of work: (1) set-up (2) equation (3) solution. Circle your solution. 1. a. Share price is $100.00, expected dividend is $ 4.00 one year from now. expected capital gain is 9%, What is the return on equity? b. Expected dividend is $7.50 one year from now on EPS of $15. If the current dividend yield is 8% and return on equity is 14%, What is the share price today? 2. True Blue Hardware Co. will pay a dividend of $2.00 per share this year and dividends per share are expected to grow at a rate of 5% per year in perpetuity. The market capitalization rate is 9.8% for stocks with similar risk. a. Compute the current price and dividend yield for the Company’s shares. b. Estimate the share price, dividend yield and capital gain on the Company’s shares three years from now. c. Based on new information, the growth rate on the Company’s dividends is lowered to 2% per year in perpetuity. How does this change your answer for part a?