Finance Fairy Incorporated (FF) has been known for sprinkling its common share dividends only very sparsely. For the past 15 years it paid $2 per share each year. You bought a share of FF three years ago, and at that time there was no expectation that dividends would grow in the future. However, today the company announced a new corporate strategy that would allow its profits (and, hence, its dividends) to grow at a rate of 3% annually. This is great news ! But unfortunately, it also adds more risk to the company. Consequently, the risk-premium that investors apply to value FF jumps from the historical 3% all the way to 5%. Assume that the risk-free rate has always been and will remain constant at 2%.

a)At what price did you initially purchase FFI?

b) If you sell the stock in two years from today, what will your capital gain have been on this investment? ("capital gain" ignores dividend payments, so just give the differences in prices)

C) So far you did not earn any interest on the dividends you received (i.e., you kept the money under your pillow instead of putting it into a bank account). However, starting today you finally place this money (along with all future dividends) into your bank account. This account pays the risk-free rate, compounded annually. What will your dividend account balance be when you sell the stock in 2 years ?