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(a) Consider the following stocks: Stock A is expected to pay a dividend of 2 forever; Stock B is expected to pay a dividend

 

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(a) Consider the following stocks: Stock A is expected to pay a dividend of 2 forever; Stock B is expected to pay a dividend of 0.75 next year, 0.9 in year 2 with dividend growth expected to be 3% per annum thereafter. If the required return on similar equities is 6%, calculate the price of each stock. (b) Explain why it is more difficult to value common stock (ordinary shares) compared to corporate bonds (c) Formally derive and discuss the dividend discount model used for the valuation of common stocks. (d) Discuss the assumptions of the Gordon growth model.

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