Question

CONSTANT GROWTH Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.00 yesterday. Bahnsen's dividend is expected to grow at 6% 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 13%. a. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. Note that Do - $2.00. Round your answer to the nearest cent. D1 - $ D2- D3 - $ 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. Round your answer to the nearest cent. Do not round your intermediate calculations. c. You expect the price of the stock 3 years from now to be $36.07; that is, you expect Ps to equal $36.07. Discounted at a 13% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $36.07. Round your answer to the nearest cent. Do not round your intermediate calculations. d. If you plan to buy the stock, hold it for 3 years, and then sell it for $36.07, what is the most you should pay for it today? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

1.
=2*1.06=2.12

2.
=2*1.06^2=2.2472

3.
=2*1.06^3=2.382032

4.
=2*(1.06/1.13)+2*(1.06/1.13)^2+2*(1.06/1.13)^3=5.28686108571852

5.
=36.07/1.13^3=24.9983193533565

6.
=2*(1.06/1.13)+2*(1.06/1.13)^2+2*(1.06/1.13)^3+36.07/1.13^3=30.285180439075

7.
=2*1.06/(13%-6%)=30.2857142857143

8.
Option I