Problem: Your broker offers to sell you some shares of Swift and Co. common stock that has just paid an annual dividend of $2.00 (yesterday). You expect the dividend to grow at the rate of 5% per year for the next 3 years, and, if you buy the stock, you plan to hold it for 3 years and then sell it. (Pr. 10-14)
a. Determine the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. (Note: D0 = $2.00.)
b. Swift and Co.'s appropriate discount rate is 12%; the first of the expected dividend payments will occur 1 year from now. Calculate the present value of the dividend stream; that is, calculate the PV of D1. D2, and D3, and then sum these PVs.
c. You expect the price of Swift and CO. common stock to be $34.73 three years from now; that is, you expect P(hat)3 to equal $34.73. Discounted at a 12% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $34.73.
d. If you plan to buy the stock, hold it for 3 years, and then sell it for $34.73, what is the most you should pay for it?
e. Use Equation 10-2a (p. 395) to calculate the present value of this stock. Assume that g = 5%, and it is constant.
f. Is the value of the stock dependent upon how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P(hat)0?