Problem 1

You buy shares of XYZ Corp stock that paid a dividend of $2 per share yesterday. XYZ's dividends are expected to grow 5% per year for the next three years. You plan to hold the stock for 3 years then sell it. Your appropriate discount rate is 12%. Calculations A. Find the expected dividend for each of the next three years: D1, D2, and D3.

g
D0
D1
D2
D3

B. Given that the first dividend payment, D1, will occur one year from now, find the present value of the dividend stream D1 - D3. r Present Value D1 Present Value D2 use the "PV" formula to compute these Present Value D3 Sum of Present Value Dividend Stream C. Assume you expect the price of XYZ shares will be P3 = $34.73 on the date you sell, three years from now. What is the present value of P3? r P3 Present Value P3 use the "PV" formula to compute this D. What is the most you should pay for XYZ shares today? P0