In: Finance
CONSTANT GROWTH Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.00 yesterday. Bahnsen's dividend is expected to grow at 6% 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 12%.
|
Year | Dividend | Growth rate 6% | Dividend | Discounting factor @12% | Present value of dividends | |
0 | D0 | 2.000 | 1 | |||
1 | D1 | 0.06 | 2.12 | 0.8929 | 1.89 | |
2 | D2 | 0.06 | 2.25 | 0.7972 | 1.79 | |
3 | D3 | 0.06 | 2.38 | 0.7118 | 1.70 | |
5.38 | ||||||
a | D1 | $ 2.12 | ||||
D2 | $ 2.25 | |||||
D3 | $ 2.38 | |||||
b | D1 | $ 1.89 | ||||
D2 | $ 1.79 | |||||
D3 | $ 1.70 | |||||
PV of dividends | $ 5.38 | |||||
c | P3 | 42.08 | Must be discounted to Present value 3 years 0.7118 | |||
=42.08*.7118 | ||||||
PV of expected future stock | $ 29.95 | |||||
d | Estimated Value of Share= 5.38+29.95 | $ 35.33 |