Question

Consider the following three stocks:

Stock A is expected to provide a dividend of $6 a share forever.

Stock B is expected to pay a dividend of $3.5 next year. Thereafter, dividend growth is expected to be 3% a year forever.

Stock C is expected to pay $1.25, $3.80, and $3.00 over the next three years, respectively. Starting in year 4 and thereafter, dividend growth is expected to be 3.5% a year forever.

If the discount rate for each stock is 6%, which stock is the most valuable?

Answer 1

Solution:-

To Calculate Stock price of all stock-

Stock A-

Current Price =

Current Price =

Current Price = $100.

Stock B-

Current Price =

Current Price =

Current Price = $116.67

Stock C-

Terminal Value at the year end 3 =

Terminal Value at the year end 3 =

Terminal Value at the year end 3 = $124.20

Current Price =

Current Price =

Current Price = $1.25 * 0.943 + $3.80 * 0.889 + $127.20 * 0.8396

Current Price = $1.179 + $3.382 + $106.80

Current Price = $111.36

Stock B is more valuable than stock A and stock C. As it has higher currentr price than others stock.

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