Ask Question
15 August, 03:18

Stock A is expected to provide a dividend of $13.4 a share forever. Stock B is expected to pay a dividend of $6.7 next year. Thereafter, dividend growth is expected to be 4% a year forever. Stock C is expected to pay a dividend of $6.7 next year. Thereafter, dividend growth is expected to be 20% a year for 5 years (i. e., years 2 through 6) and zero thereafter. If the market capitalization rate for each stock is 10%, which stock is the most valuable?

+5
Answers (1)
  1. 15 August, 04:02
    0
    Answer: Stock A is expected to provide a dividend of $13.4 a share forever which means it is a perpetuity. The market capitalization is 10% which means that 10% is the required rate of return. The formula to find the value of a perpetuity is Cash Flow/Rate

    The cash flow is 13.4 and rate is 10% so 13.4/0.1 = $134

    The present value of Stock A is $134

    Stock B is expected to pay a dividend of $6.7 next year and then have a constant growth rate of 6% forever, so we can find what the present value of Stock B will be next year using the DDM method and then discount that value to this year.

    1 year from now dividend = 6.7

    Growth = 4%

    R = 10%

    Formula = D * (1+G) / R-G

    = 6.7 * (1+0.04) / 0.1-0.04=116.113

    Now we need to discount 116.113 back one year so 116.113/1.1 = 105.57

    The present value of Stock B is 105.57

    For stock C the next year dividend is 6.7 and then for 5 years the growth rate is 20% and then 0 forever so we need to find the value of stock C 6 years from now and then discount it back.

    Dividend 1 year from now = 6.7

    Dividend 6 years from now = 6.7 * (1.2) ^5=16.67

    Value of stock 6 years from now

    D = 16.67

    G = 0

    R = 10

    16.67 * (1+0) / (0.1-0)

    =166.7174

    Now we need to discount back this value 6 years to find the present value of the stock

    166.7174/1.10^6

    =94.10

    The highest present value at a market capitalization of 10% for each stock is of stock A which is $134
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Stock A is expected to provide a dividend of $13.4 a share forever. Stock B is expected to pay a dividend of $6.7 next year. Thereafter, ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers