Stock is expected to provide a dividend

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Reference no: EM131020936

Consider the following two stocks:

A: Stock A is expected to provide a dividend of $16 a share forever.

B: Stock B is expected to pay a dividend of $8 next year. Thereafter, dividend growth is expected to be 15% a year for seven years (i.e., until year 8) and 0% thereafter.

a) What are the prices of each stock if the appropriate discount rate for each stock is 14%? Which stock is the most valuable?

b) What are the prices of each stock if the appropriate discount rates are as follows: for the first eight years, the rate is 7%, and then 14% thereafter? Which stock is the most valuable?

Reference no: EM131020936

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