Question
Two investors are considering purchasing Lowes Companies (LOW) common stock. The investors agree on the expected values of Div1 ($1.60) and the expected future dividend
Two investors are considering purchasing Lowes Companies (LOW) common stock. The investors agree on the expected values of Div1 ($1.60) and the expected future dividend growth rate (3%). They also agree on the riski ness of the stock and, thus, on the discount rate (required rate of return) of 5%. Assume that the first investor would plan to sell the stock after 2 years and the second investor would plan on selling the stock after 5 years. (a) Given the forecasted future dividend stream, calculate what the selling price would be at t=2. (1 pt.) [HINT: For parts a and b, please see the Lesson4 handout behind the link Stock Price = PV of Future Dividends.] (b) Calcu late what the selling price will be at t=5. (1 pt.) (c) Draw a timeline for each investor, depicting the future cash flows that the investor expects to receive across his/her holding period, (d) Would our two investors agree on to day's price of the stock, or would they disagree on the price of the stock because of the differences in the two an ticipated holding periods? Show math and explain your answer.
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