a. A company will pay a total dividend of $3,800. The dividend will be increased by 8% for two years and will then reduc

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a. A company will pay a total dividend of $3,800. The dividendwill be increased by 8% for two years and will then reduce itsdividend growth rate by 2 percentage points per year until itreaches the industry average of 2 percent dividend growth, afterwhich the company will keep a constant growth rate forever. Themarket value of the company’s debt is $20,000 and its book value is$18,000. The number of shares is 3,700. Assume that cost of debt is3%, the tax rate is 39%, and the cost of equity is 10.4%.
i. What is the fair value of the company stock price?
ii. Your friend expects that the company will maintain a payoutratio of 26% and a profit margin of 38%, and the stock can be soldat 3x price-to-sales ratio after five years (right after the fifthdividend is paid). What is the maximum price that your friend iswilling to purchase the stock today?