Consider the following three stocks:
a. Stock A is expected to provide a dividend of $10 a share forever.
b. Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 4% a year forever.
c. 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., until year 6) and zero thereafter.
If the market capitalization rate for each stock is 10%, which stock is the most valuable? What if the capitalization rate is 7%?
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