Consider the following two stocks: A:

Stock A is expected to provide a dividend of $16 a share forever.

B: Stock B is expected to pay a dividend of $8 next year. Thereafter, dividend growth is expected to be 15% a year for seven years (i.e., until year 8) and 0% thereafter.

a) What are the prices of each stock if the appropriate discount rate for each stock is 14%? Which stock is the most valuable?

b) What are the prices of each stock if the appropriate discount rates are as follows: for the first eight years, the rate is 7%, and then 14% thereafter? Which stock is the most valuable?