Consider the following three stocks: a. Stock A is expected to provide a dividen
ID: 2709163 • Letter: C
Question
Consider the following three stocks: a. Stock A is expected to provide a dividend of $11.70 a share forever. b. Stock B is expected to pay a dividend of $6.70 next year. Thereafter, dividend growth is expected to be 6% a year forever. c. Stock C is expected to pay a dividend of $4.30 next year. Thereafter, dividend growth is expected to be 22% a year for five years (i.e., until year 6) and zero thereafter.
If the market capitalization rate for each stock is 12%, what is the stock price for each of the stocks?(Do not round intermediate calculations. Round your answers to 2 decimal places.)
Which stock is the most valuable?
If the market capitalization rate for each stock is 9%, what is the stock price for each of the stocks?(Do not round intermediate calculations. Round your answers to 2 decimal places.)
Which stock is the most valuable?
a-1.If the market capitalization rate for each stock is 12%, what is the stock price for each of the stocks?(Do not round intermediate calculations. Round your answers to 2 decimal places.)
Explanation / Answer
Answer a-1 :
Stock A Price = 11.7 / 0.12 = 97.5
Stock B Price = D1 / (r-g) = 6.7 / (0.12-.06) = 111.67
Stock C Price = D1 / (1+r) + D1 (1+g) / (1+r)2 + D1 (1+g)2 / (1+r)3 + D1 (1+g)3 / (1+r)4 + D1 (1+g)4 / (1+r)5 + D1 (1+g)5 / (r * (1+r)5 )
Stock C Price = 72.01
Answer a-2 : Stock C is the most valuable as it is sold at the lowest price with same rate of return.
Answer b-1 :
Stock A Price = 11.7 / 0.09 = 130
Stock B Price = D1 / (r-g) = 6.7 / (0.09-.06) = 223.33
Stock C Price = D1 / (1+r) + D1 (1+g) / (1+r)2 + D1 (1+g)2 / (1+r)3 + D1 (1+g)3 / (1+r)4 + D1 (1+g)4 / (1+r)5 + D1 (1+g)5 / (r * (1+r)5 )
Stock C Price = 102.02
Answer b-2 : In this case also, Stock C is the most valuable as it is sold at the lowest price with same rate of return.