Answer:
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.