Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.75 yesterday. Bahnsen's dividend is expected to grow at 8% per year for the next 3 years. If you buy the stock, you plan to hold it for 3 years and then sell it. The appropriate discount rate is 11%.
a.D1 = 2.75(1.08) = $2.97
D2 = 2.75(1.08)2 = $3.2076 or 3.21
D3 = 2.75(1.08)3 = $3.46
b.Present value of dividend streams = 2.97/(1.11) + 3.21/(1.11)2 + 3.46/(1.11)3
= $7.81
c.Present value = 124.71/(1.11)3 = $91.1868 i.e. $91.19
d.Money paid today = $7.81 + $91.19
= $99
e.Present value = 2.75(1.08)/(11%-8%)
= $99
f.I Value remains the same
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