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 4% 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 D0 = $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 $39.00; that is, you expect to equal $39.00. Discounted at a 10% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $39.00. 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 $39.00, what is the most you should pay for it today? Round your answer to the nearest cent. Do not round your intermediate calculations. $ ? ? ? ? ? ?
e. Assume that g = 4% and that it is constant. Do not round intermediate calculations. Round your answer to the nearest cent. $