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Consider the following three stocks: a) Stock A is expected to provide a dividend of $10 a share forever (starting next year); b) Stock B
Consider the following three stocks: a) Stock A is expected to provide a dividend of $10 a share forever (starting next year); b) Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 4% forever; c) Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 20% per year for 5 years (i.e., until year 6) and zero thereafter. If the appropriate interest rate to discount the cash flows is 10% per year for all stocks, which stock is the most valuable? What if the appropriate interest rate is 7% per year
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