Homework SourseYour broker offers to sell you some shares of Bahnsen Co co
Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.50 yesterday. Bahnsen\'s dividend is expected to grow at 4% 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 11%.
Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. Note that D0 = $2.50. 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 $41.78; that is, you expect to equal $41.78. Discounted at a 11% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $41.78. 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 $41.78, 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.
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Assume that g = 4% and that it is constant. Do not round intermediate calculations. Round your answer to the nearest cent.
$
Solution
D1 = dividend for year 1
D2 = dividend for year 2
D3 = dividend for year 3
g = growth rate = 4%
D1 = D0 [1+g] = 2.50*1.04 = $2.60
D2 = D1 [1+g] = 2.60*1.04 = $2.704
D3 = D2 [1+g] = 2.704*1.04 = $2.81216
Cash flow
Present value factor@11%
Present value of dividend
D1
2.60
0.9009
2.34
D2
2.704
0.8116
2.19
D3
2.81216
0.7312
2.06
P3 = Price of stock for year 3 =$41.78
Present value of P3 = $41.78 * Present value factor of 11% for 3rd year
Present value of P3 = 41.78*0.7312 = $30.55
Price to buy stock value today :
Cash flow
Present value factor@11%
Discounted cash flow
D1
2.60
0.9009
2.34
D2
2.704
0.8116
2.19
D3
2.81216
0.7312
2.06
P3
30.55
0.7312
30.55
37.14
Price of stock today = $ 37.14
| Cash flow | Present value factor@11% | Present value of dividend | |
| D1 | 2.60 | 0.9009 | 2.34 |
| D2 | 2.704 | 0.8116 | 2.19 |
| D3 | 2.81216 | 0.7312 | 2.06 |
