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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?
SML Suppose you observe the following situation: Return if State Occurs State of Probability of Economy State Stock A Stock B Bust .15 − .10 − .08 Normal .60 .09 .08 Boom .25 .32 .26 a. Calculate the expected return on each stock. (Do not round inter..
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