Consider the following three stocks:

1. Stock A is expected to provide a dividend of $12 a share forever.
2. Stock B is expected to pay a dividend of $6 next year. Thereafter, dividend growth is expected to be 4% a year forever.
3. Stock C is expected to pay a dividend of $6 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 11%, which stock is the most valuable?

multiple choice 1

• Stock A

• Stock B

• Stock C

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

multiple choice 2

• Stock A

• Stock B

• Stock C