Constant growth
Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $1.25 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 11%.
A) Find the expected dividend for each of the next 3 years; that is, calculate D1, D2 and D3. Note that D0 = $1.25. Round your answer to the nearest cent.
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.
C) You expect the price of the stock 3 years from now to be $31.56; that is, you expect to equal $31.56. Discounted at a 11% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $31.56. Round your answer to the nearest cent.
D) If you plan to buy the stock, hold it for 3 years, and then sell it for $31.56, what is the most you should pay for it today? Round your answer to the nearest cent.