Consider the following three stocks:

(1) Stock A is expected to provide a dividend of $10 a share forever.

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

(3) Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 20% a year for 5 years (i.e., years 2 through 6) and zero thereafter.

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

Stock A

Stock B

Stock C

(b) If the market capitalization rate for each stock is 7%, which stock is the most valuable?

Stock A

Stock B

Stock C