Randy and Ted are shareholders in GenCo. Randy and Ted both agree that GenCo’s d

Question

Randy and Ted are shareholders in GenCo. Randy and Ted both agree that GenCo’s dividends and share price will go up by 5% each year for the next two years. Randy and Ted also both have the same required return of 10%. If Randy intends to hold his shares for two years and Ted intends to hold his shares for one year, what are their relative valuations of GenCo stock today?

a. Randy has a higher valuation because he is a longer term investor

b. Ted has a higher valuation because he is a shorter term investor

c. Randy and Ted have the same valuation

Explanation / Answer

The option is (c) Randy and Ted have the same valuation

Reason: The valuation of the stock is simply present value of all the future cashflow and at any point of time the valuation is same for all. The capital appreciation might differ based on when the selling of the stock takes place.

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