alpha is expected to provide a dividend of sh 20 per share per year forever starting...

alpha is expected to provide a dividend of sh 20 per share per year forever starting one year from now.beta is expected to pay a dividend of sh 10 per share in one years time thereafter dividend growth is expected to be 4%per annum forever.omega is is expected to pay a dividend of sh 10 per shar in one years time therafter dividend growth is expected to be 20% per annum for 4yrs and zero thereafter.if marketcapitalization rate for each share is 10%per annum which share is most valuable

Expert Solution

Company Name	Alpha	Beta
Dividend after one year	20	10
Dividend Growth	-	4%
Capitalisation rate	10%	10%
vaule of stock = Dividend/(Capitalisation rate- Dividend growth)	200	166.6667

Company Name	Omega
Dividend	10
Dividend Growth	20% for 4 years
Capitalisation rate	10%
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
Dividend	10	12	14.4	17.28	20.736
Present value at 10% discount rate	9.090909	9.917355	10.81893	11.80247	12.87542
Price remains constant forever from 5th year
Price of Omega stock at beginning of 5th year	= 20.736/10% =		207.36
Present value of the stock price	= 207.36/(1+0.1)^4=		141.6297
Price of stock of Omega =	(Present value of dividends from year 1 to year 4) +
	Present value of ( Dividend of year 5/10%)
=	183.2593

Since the value of Alpha is highest hence Alpha stock is more valuable

jeff jeffy answered 1 year ago

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