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Consider the following three stocks. Stock Alpha is expected to pay a dividend of $1.50 per share forever – no growth or decline. Stock Beta will pay a dividend of $3.25 next year. Dividends are expected to grow at 2.5% per year forever. 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%?
Sagot :
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