Reference no: EM132886125

Consider the following three stocks:

• Stock A is expected to provide a dividend of $50 a share forever
• Stock B is expected to pay a dividend of $8 next year. Thereafter, dividend growth is expected to be 2% a year forever.
• Stock C is expected to pay a dividend of $15 next year. Thereafter, dividend growth is expected to be 12% a year for 4 years (until year 5) and zero thereafter.

Problem a. If the market capitalization rate for each stock is 8%, which stock is the most valuable?

Problem b. What happens if the capitalization rate drops to 6%? Explain

Problem c. Assume EPS for stock A is 4, Stock B 9, and Stock C 15. Calculate the P/E ratio for each. Briefly explain what the different values mean to you.