Which stock is most valuable

Reference no: EM133432235

Question: Consider the following three stocks:

Stock A is expected to provide a dividend of $10 a share forever

Stock B is expected to pay a dividend of $ 5 next year. Thereafter, dividend growth is expected to be 4% forever.

Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 20% a year for five years (years 2 through 6, as C recovers from a severe recession) and zero thereafter.

If the cost of equity for each stock is 10%, which stock is most valuable? What if the capitalization rate is 7%?

Reference no: EM133432235

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