Consider the following three stocks. (a) Stock Q is expected to pay a dividend of $2.20 per share forever no growth or decline. (b) Stock R will pay a dividend of $1.40 next year. Dividends are expected to grow at 3% per year forever. (c) Stock S is recovering from several years of losses, during which its dividend was cut to $.50 per year. The now-profitable company is expected to increase dividends by $.50 per year for four years (DIV1 = $1.00, DIV2 = $1.50, DIV3 $2.00, DIV4 = $2.50). Thereafter dividends are not expected to grow or decline. The cost of capital is 9.5%. How much is each stock worth today (ex-dividend)?
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