Constant growth
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%.
Find the expected dividend for each of the next 3 years; that is, calculate D1, D2 and D3. Note that D0 = $2.75. Round your answer to the nearest cent.
D1 = $
D2 = $
D3 = $
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 D3and then sum these PVs. Round your answer to the nearest cent. Do not round your intermediate calculations.
$
You expect the price of the stock 3 years from now to be $124.71; that is, you expect to equal $124.71. Discounted at a 11% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $124.71. Round your answer to the nearest cent. Do not round your intermediate calculations.
$
If you plan to buy the stock, hold it for 3 years, and then sell it for $124.71, what is the most you should pay for it today? Round your answer to the nearest cent. Do not round your intermediate calculations.
$
Use equation below to calculate the present value of this stock.
Assume that g = 8% and that it is constant. Do not round intermediate calculations. Round your answer to the nearest cent.
$