Your broker offers to sell you some shares of Bahnsen & Co. common stock that pa

Question

Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $1.50 yesterday. Bahnsen's dividend is expected to grow at 4% per year for the next 3 years, and, if you buy the stock, you plan to hold it for 3 years and then sell it. The appropriate discount rate is 12%.

Find the expected dividend for each of the next 3 years; that is, calculate D1, D2 and D3. Note that D0 = $1.50. Round answers to the nearest hundredth.

a. D1 =
b. D2 =
c. D3 =

d. Given that the first dividend payment will occur 1 year from now, find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs. Round your answer to two decimal places.


e. You expect the price of the stock 3 years from now to be $21.93; that is, you expect P ? ?3 to equal $21.93. Discounted at a 12% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $21.93. Round your answer to two decimal places.


f. If you plan to buy the stock, hold it for 3 years, and then sell it for $21.93, what is the most you should pay for it today? Round your answer to two decimal places.


g. Use Equation 9-2 to calculate the present value of this stock. Assume that g = 4%, and it is constant. Round your answer to two decimal places.

Explanation / Answer

a - d1= 2.10 d2= 2.205 d3= 2.315 b - 5.28 (PV of 1.875 + 1.7578 +1.6478) c - 24.72 d - 24.72 e - Assume it will be 24.72 f - Of course. Market price is the present value of future dividend stream divided by expected return.Future dividend stream for 2, 3 or 5 years discounted to PV will be different.

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