Question

Intro IBM just paid an annual dividend of $2.7 per share. The dividend is expected to grow by 4% per year. The required rate of return is 12%. IB Part 1 Attempt 1/10 for 10 pts. By DDM/Gordon growth model, what is the price to sell the stock in 3 years? 1+ decimals Submit Part 2 TB Attempt 1/10 for 10 pts. If you buy the stock today, hold it, sell it in 3 years at the price computed in Part 1, what is the present value of all cashflows -D, D2, D3, Ps- you receive? 1+ decimals Submit - Attempt 1/10 for 10 pts. Part 3 B By Gordon growth model, what is the current stock price? How does your answer here compare to Part 2. what do you for Submit
Answer all of them

Answer 1

1) Price in year 3, P3 = D4 / (r - g)

where, D4 - Dividend in year 4 = D0 x (1 + g)^4 = 2.70 x (1 + 4%)^4 = $3.16

P3 = 3.16 / (12% - 4%) = $39.48

2) D1 = 2.70 x 1.04 = 2.81, D2 = 2.81 x 1.04 = 2.92, D3 = 2.92 x 1.04 = 3.04

PV = D1 / (1 + r) + D2 / (1 + r)^2 + (D3 + P3) / (1 + r)^3

= 2.81 / 1.12 + 2.92 / 1.12^2 + (3.04 + 39.48) / 1.12^3

= $35.10

3) Using DDM, current price = D1 / (r - g) = 2.81 / (12% - 4%) = $35.10