Consider the following three stocks.
a. Stock Alpha is expected to pay a dividend of $1.50 per share forever - no growth or decline.

b. Stock Beta will pay a dividend of $3.25 next year. Dividends are expected to grow at 2.5% per
year forever.

c. Stock Delta is recovering from several years of poor financial results, during which its dividend was cut to $0.25 per year. After a significant restructuring, the company is expected to
increase dividends by $.25 per year for four years (DIV1 = $0.50, DIV2 = $0.75, DIV3 = $1.00, DIV4 = $1.25). Thereafter dividends are not expected to grow or decline.

What is the value of each stock, assuming the cost of capital is 12%?

Answer rating: 100% (QA)

To calculate the value of each stock we can use the Gordon Growth Model which is expressed as V0 D1 ... View the full answer