Problem 4-18 Two-stage DCF model

Consider the following three stocks:

1. Stock A is expected to provide a dividend of $11.80 a share forever.
2. Stock B is expected to pay a dividend of $6.80 next year. Thereafter, dividend growth is expected to be 3.00% a year forever.
3. Stock C is expected to pay a dividend of $4.20 next year. Thereafter, dividend growth is expected to be 19.00% a year for five years (i.e., years 2 through 6) and zero thereafter.

a-1. If the market capitalization rate for each stock is 9.00%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a-2. Which stock is the most valuable?

multiple choice 1

• Stock C

• Stock B

• Stock A

b-1. If the market capitalization rate for each stock is 6.00%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b-2. Which stock is the most valuable?

multiple choice 2

• Stock A

• Stock B

• Stock C