Q3. (a)Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $1.5 yesterday. Bahnsen's dividend is expected to grow at 5%, 7% and 10% per year for the next 3 years respectively. If you buy the stock, you plan to hold it for 3 years and then sell it. Bahnsen's beta is = 1.6, risk free rate is RF = 7% and risk-premium on market is RPM = 6%.

i. Find the expected dividend for each of the next 3 years.

ii. Given that the first dividend payment will occur 1 year from now, find the present value of

the dividend stream and then sum these PVs.

iii. You expect the price of the stock 3 years from now to be $50.00. Discounted at a required

rate of return, what is the present value of this expected future stock price?

iv. If you plan to buy the stock, hold it for 3 years, and then sell it for $50.00, what is the most

you should pay for it today?

v. Using constant dividend growth model, calculate the present value of this stock. Assume that

g is 10% and that it is constant.

vi. 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? Explain.

(b) Bridges & Associates' stock is expected to pay a $1.75 per-share dividend at the end of the

year. The dividend is expected to grow 20 percent the next year and 45 percent the following

year. After t = 3, the dividend is expected to grow at a constant rate of 7 percent a year. The

company's cost of common equity is 12 percent and it is expected to remain constant.

i. What is the expected price of the stock today?

ii. What is the expected price of the stock 10 years from today, 15 years from today and 20 years

from today?