Consider the following three stocks: stock a is expected to provide a dividend of $10 a share forever. stock b is expected to pay a dividend of $5 next year. thereafter, dividend growth is expected to be 4% a year forever. stock c is expected to pay a dividend of $5 next year. thereafter, dividend growth is expected to be 20% a year for five years (i. e., years 2 through 6) and zero thereafter. if the market capitalization rate for each stock is 10%, which stock is the most valuable?

Value of stock =$100

Value of stock B=$83.33

Value of stock C = $104.51

Explanation:

Stock A

A dividend of $10 a share forever is a perpetuity.

PV of a perpetuity =

where CF is the cash-flow expected per compounding period = $10

            ke=return on investment or market capitalization rate=0.1

Value of stock A = =$100

Stock B

Given D1=$5, g = 4% forever- this stream of cash-flows can be valued using the constant growth model where

PV=

where D1 is the dividend expected at the end of year 1 = $5

             ke is the return on investment or market capitalization rate = 0.1

             g is the growth rate = 0.04

Value of stock B= = $83.33

Stock C

The stock dividends  have two distinct growth periods, the 1st 6 years where g= 20% and after that, zero growth

Price of the stock C =

where P6=

Price of the stock C =

= =$104.51

Stock C is more valuable as it has a higher present value of cash flows.

hi,

henry is an economist and wants to understand the relationship between inflation and consumer spending habits. for his research, he needs the consumer price index for 2014 and the inflation rate. based on the prices of goods given, what will he find to be the cpi and inflation rate for 2014? assume that a consumer’s basket for three consecutive years consists of the following:

you dont privide answer choices.

answer - 15% of a inflatation rate is 15% less in cpi

answer; windows embedded;