# Suppose a firms common stock paid a dividend of $2 yesterday. You expect the dividend to grow

## Question:

a. Find the expected dividend for each of the next 3 years; in other words, calculate D1, D2, and D3. Note that D0 = $2.

b. Given that the appropriate discount rate is 12% and that the first of these dividend payments will occur 1 year from now, find 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 the stock 3 years from now to be $34.73 (i.e., you expect P3 = $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 7-2 to calculate the present value of this stock. Assume that g = 5% and is constant.

f. Is the value of this stock dependent on 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, P0? Explain your answer.

Common Stock

Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Discount Rate

Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Dividend

A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...

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**Related Book For**

## Corporate Finance A Focused Approach

**ISBN:** 978-1439078082

4th Edition

**Authors:** Michael C. Ehrhardt, Eugene F. Brigham