Consider the following three stocks a. Stock A is expected to provide a dividend

Question

Consider the following three stocks a. Stock A is expected to provide a dividend of $10.50 a share forever b. Stock B is expected to pay a dividend of $5.50 next year. Thereafter, dividend growth is expected to be 4.00% a year forever c. Stock C is expected to pay a dividend of $5.50 next year. Thereafter, dividend growth is expected to be 20.00% a year for five years (i.e., years 2 through 6) and zero thereafter. a-1. If the market capitalization rate for each stock is 10.00%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Stock Price Stock A Stock B Stock C a-2. Which stock is the most valuable? Stock A Stock B Stock b-1. If the market capitalization rate for each stock is 7.00%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Stock Price Stock A Stock B Stock C

Explanation / Answer

a.

Stock price of A=10.50/10.00%=105.00

b.

Stock price of B=5.50/(10%-4%)=91.67

c.

Stock price of C=5.50/(1+10%)^1+(5.50*(1+20%)^1)/(1+10%)^2+(5.50*(1+20%)^2)/(1+10%)^3+(5.50*(1+20%)^3)/(1+10%)^4+(5.50*(1+20%)^4)/(1+10%)^5+(5.50*(1+20%)^5)/(1+10%)^6+((5.50*(1+20%)^5*(1+0%))/(10%-0%))/(1+10%)^6

=114.96

a-2

stock C is most valuable

b-1

Stock price of A=10.50/7.00%=150.00

Stock price of B=5.50/(7%-4%)=183.33

Stock price of C=5.50/(1+7%)^1+(5.50*(1+20%)^1)/(1+7%)^2+(5.50*(1+20%)^2)/(1+7%)^3+(5.50*(1+20%)^3)/(1+7%)^4+(5.50*(1+20%)^4)/(1+7%)^5+(5.50*(1+20%)^5)/(1+7%)^6+((5.50*(1+20%)^5*(1+0%))/(7%-0%))/(1+7%)^6

=172.15

the above is answer..

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