Question 3
Recently, you are tasked by your manager to evaluate the investment potential of 2 stocks, Stock A and Stock B. The cost of equity is 8% for both Stock A and Stock B.
The following expected dividend payments for the following years are as follow:
(a) Estimate the dividend growth rate from year 6 onwards for both stocks. Justify your estimation approach.
(b) Using Gordon Dividend Growth Mode and your estimation of the dividend growth rates, determine the value of Stock A and B.
(c) Which stock should you recommend for investment? Justify your recommendations.
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