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% a year forever.

c. 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 (i.e., until year 6) and zero thereafter.

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

What if the capitalization rate is 7%?

AppendixLO1