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CONSTANT GROWTH Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $1.50 yesterday. Bahnsen's dividend
CONSTANT GROWTH
Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $1.50 yesterday. Bahnsen's dividend is expected to grow at 8% 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 9%.
- Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. Note that D0 = $1.50. Round your answer 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. Round your answer to the nearest cent. Do not round your intermediate calculations. $
- You expect the price of the stock 3 years from now to be $204.07; that is, you expect to equal $204.07. Discounted at a 9% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $204.07. Round your answer to the nearest cent. Do not round your intermediate calculations. $
- If you plan to buy the stock, hold it for 3 years, and then sell it for $204.07, what is the most you should pay for it today? Round your answer to the nearest cent. Do not round your intermediate calculations. $
- Use equation below to calculate the present value of this stock.
- Assume that g = 8% and that it is constant. Do not round intermediate calculations. Round your answer to the nearest cent. $
- 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, ?
- Yes. The value of the stock is dependent upon the holding period as long as the growth rate remains constant for the foreseeable future.
- No. The value of the stock is not dependent upon the holding period. The value calculated in parts a through d is the value for a 3-year holding period. It is equal to the value calculated in part e. Any other holding period would produce the same value of .
- Yes. The value of the stock is dependent upon the holding period. The value calculated in parts a through d is the value for a 3-year holding period. It is not equal to the value calculated in part e. Any other holding period would produce a different value of .
- Yes. The value of the stock is dependent upon the holding period due to the fact that the value is determined as the present value of all future expected dividends.
- No. The value of the stock is not dependent upon the holding period unless the growth rate remains constant for the foreseeable future.
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