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 5 years (i.e., until

year 6) and zero thereafter.

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

What if the discount rate is 7 %?

Hint: The price of a stock is the PV of the dividends.