Question

Consider the following three stocks: Stock A is expected to provide a dividend of $14 a share forever. Stock B is expected to pay a dividend of $7 next year. Thereafter, dividend growth is expected to be 4% a year forever. Stock C is expected to pay a dividend of $7 next year. Thereafter, dividend growth is expected to be 20% a year for 5 years (i.e., years 2 through 6) and zero thereafter. a. If the market capitalization rate for each stock is 9%, which stock is the most valuable?

Answer 1

Stock A value will be=14/9%=155.56

Stock B value will be=7/(9%-4%)=140.00

Stock C value will be=7/(1+9%)^1+(7*(1+20%)^1)/(1+9%)^2+(7*(1+20%)^2)/(1+9%)^3+(7*(1+20%)^3)/(1+9%)^4+(7*(1+20%)^4)/(1+9%)^5+(7*(1+20%)^5)/(1+9%)^6+((7*(1+20%)^5)/9%)/(1+9%)^6

=165.06

stock is the most valuable: Stock C