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 5% 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 12%.

a. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. Note that D0 $2 00.

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.

c. You expect the price of the stock 3 years from now to be $34 73; that is, you expectP^

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 today?

e. Use Equation 9.2 to calculate the present value of this stock. Assume that g 5% and that it is constant.

f. Is the value of this stock dependent upon how long you plan to hold it? In other words, if your planned holding period was 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P^

0? Explain.

AppendixLO1