The Preferred Stock of ACE Pays a Constant $1

Essay

The preferred stock of ACE pays a constant $1.00 per share dividend. The common stock of ACME just paid a $1.00 dividend per share, but its dividend is expected to grow at 4% per year forever. ABLE common stock also just paid a dividend of $1.00 per share but its dividend is expected to grow at 10% per year for 5 years and then grow at 4% per year forever. All three stocks have a 12% required return. How much should you be willing to pay for a share of each stock? Which stock will give you the best return? Explain.