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Stock Value

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Consider the following three stocks:

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

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

C: Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 20 percent a year for 5 years (i.e., until year 6) and zero thereafter.

If the market capitalization rate for each stock is 10 percent, which stock is the most valuable?

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Solution Summary

Identifies the stock with the highest value

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