Question

Consider the following three stocks:

1. Stock A is expected to provide a dividend of $10.80 a share forever.

2. Stock B is expected to pay a dividend of $5.80 next year. Thereafter, dividend growth is expected to be 3.00% a year forever.

3. Stock C is expected to pay a dividend of $5.80 next year. Thereafter, dividend growth is expected to be 19.00% a year for five years (i.e., years 2 through 6) and zero thereafter.

a-1. If the market capitalization rate for each stock is 9.00%, what is the stock price for each of the stocks?(Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock A:

Stock B:

Stock C:

a-2. Which stock is the most valuable?

• Stock A

• Stock B

• Stock C

b-1. If the market capitalization rate for each stock is 6.00%, what is the stock price for each of the stocks?(Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock A:
Stock B:

Stock C:

b-2. Which stock is the most valuable?

• Stock B

• Stock C

• Stock A

Answer 1

a-1. Stock A Value = Dividend / Market capitalization Rate = $10.80 / 9% = $120

Stock B Value = Dividend next year / (Market capitalization Rate - Growth Rate) = 5.80 / 6% = $96.67

Stock C Value = $131.91

a-2. Which stock is the most valuable?

Stock C (Because its current value is more than other two stocks)

b-1. Stock A Value = Dividend / Market capitalization Rate = $10.80 / 6% = $180

Stock B Value = Dividend next year / (Market capitalization Rate - Growth Rate) = 5.80 / 3% = $193.33

Stock C Value = $207.32

b-2. Which stock is the most valuable?

Stock C (Because its current value is more than other two stocks)