Question

1. Stock A is expected to provide a dividend of $14 a share forever.
2. Stock B is expected to pay a dividend of $7 next year. Thereafter, dividend growth is expected to be 4% a year forever.
3. 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?

• Stock A

• Stock B

• Stock C

b. If the market capitalization rate for each stock is 6%, which stock is the most valuable?

• Stock A

• Stock B

• Stock C

Answer 1

DATE! WHEN (a CAPITALISATION RATE is 90% Le - STOCK A value = Dividend - 14 = $155.56 per share 0.09 STOCK B Value = Dividend, Borg where growth rate = 7 (0.09-0-07) 0.02 = 7 - 7 = & 140 per share (0-09-0.04 0.00 STOCK Value Dividendy + (Ita) Dividendy + (Hr)? Dividends (1+r) & Dividendy + " (ltssy Dividends + (ltr)s tako + (provided 2 x those)

DATE: 1 + + t (1+0.09) (ta.bg) ² 10.08 (1+0.09) 3 12.096 (1+0.ogge 14.515 (1+0.09). . + 17.418 (1+0.0956 + (17.418 x 10-090 1 +0.096 = (74.917 ) +18.4 x 8842 ) + (10.08x -772) + (12.096X .708) +(4.5157.650)+(7.488.596)+ (193.53X=596) E 6.419 + 7.073+ 7.782+ 8.364 + 9.435+ 10.38/ + 115.344 = $165EUS 14 Most valuable stock is Stock C WHEW CAPITALISATIONS NAYE is 6% Stock A Value = 14 = $233.33 0.06 STOCK B. Value = -> $350.00 7 0.06-0.04

DATE: STоск с + 8.9 (1+0:06)2 + 10.08 (1+0-06) + (1+0.06)' 12.096 (1+0.06) 4 t 14.515 (140.06) + + 47.400 + (17.1418 x dto.006) 17.418 (170.066 17.418 0:06 lto.o66 (7x .943) + 18-4x .890)+(10.087.840) +(12.0968.792) + (14.5154.747) +(17.4187.705) +(290.38.705) 6.601 + 7.476 + 8.467 +9.580+ 10.843 + 12-280 + 204.662 = $259.91 Most valuable stocki is slot Stock B
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