Consider the following three stocks a. Stock A is expected to provide a dividend
ID: 2820457 • Letter: C
Question
Consider the following three stocks a. Stock A is expected to provide a dividend of $11.10 a share forever b. Stock B is expected to pay a dividend of $6.10 next year. Thereafter, dividend growth is expected to be 5.00% a year forever c. Stock C is expected to pay a dividend of $4.90 next year. Thereafter, dividend growth is expected to be 21.00% 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 11.00%, 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? O Stock C Stock A O Stock EB b-1. If the market capitalization rate for each stock is 8.00%, 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 b-2. Which stock is the most valuable? Stock A StockB Stock CExplanation / Answer
a1)
stock A=11.1/11%=100.91
stock B=6.1/(11%-5%)=101.67
stock C=(4.9/(1+11%)^1)+(4.9*1.21/(1+11%)^2)+(4.9*1.21^2/(1+11%)^3)+(4.9*1.21^3/(1+11%)^4)+(4.9*1.21^4/(1+11%)^5)+(4.9*1.21^5/(1+11%)^6)+(4.9*1.21^5/(11%))/1.11^6)
=94.99
a2)It is stock B
b1)
stock A=11.1/8%=138.75
stock B=6.1/(11%-58)=203.33
stock C=(4.9/(1+8%)^1)+(4.9*1.21/(1+8%)^2)+(4.9*1.21^2/(1+8%)^3)+(4.9*1.21^3/(1+8%)^4)+(4.9*1.21^4/(1+8%)^5)+(4.9*1.21^5/(1+8%)^6)+(4.9*1.21^5/(8%))/1.08^6)
=136.97
b2)
It is stock B