market capitalization
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Free InquiryConsider 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.
a. If the market capitalization rate for each stock is 8%, which stock is the most valuable?
b. What happens if the capitalization rate drops to 6%? Explain
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.
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