Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a
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Question:
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%.
- Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. Note that D0 = $1.25. Do not round intermediate calculations. Round your answers 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 D3, and then sum these PVs. Do not round intermediate calculations. Round your answer to the nearest cent.
- 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 an 11% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $31.56. Do not round intermediate calculations. Round your answer to the nearest cent.
- 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? Do not round intermediate calculations. Round your answer to the nearest cent.
- Use equation below to calculate the present value of this stock.
- Assume that g = 6% and that it is constant. Do not round intermediate calculations. Round your answer to the nearest cent.
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