Question

Check My Work eBook Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $3.00 yesterday. Bahnsen's dividend is expected to grow at 5% 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 10%. a. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. Note that Do - $3.00. Do not round intermediate calculations. Round your answers to the nearest cent. Di = $ D2 = $ D = 5 b. Given that the first dividend payment will occur 1 year from now, find the present value of the dividend stream; that is, calculate the PVs of D1, D2, and D3, and then sum these PVs. Do not round intermediate calculations. Round your answer to the nearest cent. c. You expect the price of the stock 3 years from now to be $72.93; that is, you expect P, to equal $72.93. Discounted at a 10% rate, what is the present value of this expected future stock price? In otiſer words, calculate the PV of $72.93. Do not round intermediate calculations. Round your answer to the nearest cent d. If you plan to buy the stock, hold it for 3 years, and then sell it for $72.93, what is the most you should pay for it today? Do not round intermediate calculations. Round your answer to the nearest cent. e. Use equation below to calculate the present value of this stock. + D Assume that g - 5% and that it is constant. Do not round intermediate calculations. Round your answer to the nearest cent f. Is the value of this stock dependent upon how long you plan to hold it? In other words, if your planned holding period was 2 years or 5 years rather than 3

Answer 1

a.Expected Dividend

D1 = 3(1.05) = $3.15

D2 = 3(1.05)² = $3.3075 i.e. $3.31

D3 = 3(1.05)³ = $3.47

b.Present value = 3.15/1.10 + 3.31/(1.10)² + 3.47/(1.1)³

= $8.21

c.Present value = 72.93/(1.10)³

= $54.79

d.Most to be paid = 8.21+54.79

= $63

e.Stock Price = 3.15/(10%-5%)

= $63

f.IV No, does not depend