Can you help me figure out which of these three stocks is the most
valuable?  I would like the calculations in an Excel spreadsheet if
possable.

1.Stock A is expected to provide a dividend of $10 a share forever.
2.Stock B is expected to pay a dividend of $5 next year.  Thereafter,
dividend growth is expected to be 4 percent a year forever.
3.Stock C is expected to pay a dividend of $5 next year.  Thereafter,
dividend growth is expected to be 20 percent a year for 5 years (i.e.
until year 6) and zero thereafter.

If the market capitalization rate for each stock is 10 percent, which
stock is the most valuable?

Missmallprincess --

As you're aware, stocks are valued on future income streams -- or
expectations of future dividends.

We've set up an Excel spreadsheet with the income streams predicted
here to show Net Present Value of those income streams.  I've haven't
set this up as a perpetuity because it's not necessary, as the NPV of
income beyond 25 years is strongly diminished.  (I've added another 10
years of data in columns, and you can modify the NPV formula for as
many you'd like.  You'll see that the difference between Stock A and
Stock C diminishes, but only slightly.)

The Income Streams spreadsheet is here:
http://mooneyevents.com/incomestreams.xls

Obviously you pick the largest NPV -- stock A.  Stock B's growth of 4%
per year when the market rate is 10% isn't making for enough Present
Value to ever catch Stock C or Stock A.

Best regards,


Omnivorous-GA

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Request for Answer Clarification by missmallprincess-ga on 07 May 2004 13:58 PDT

The link to the spreadsheet is not working.  Can you please resend?

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Clarification of Answer by omnivorous-ga on 07 May 2004 14:20 PDT

Missmallprincess --

Sorry for the inconvenience -- I missed the WWW when I typed in the URL:
http://www.mooneyevents.com/incomestreams.xls

Best regards,

Omnivorous-GA

Thank you very much, you did an outstanding job!

You should have valued it as a perpetuity for the first one and
perptuity with growth for the second. Just FYI