Your broker offers to sell you some shares of Bahnsen &
Co. common stock that paid a dividend of $2.25 yesterday. Bahnsen's
dividend is expected to grow at 5% 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 10%.
Find the expected dividend for each of the next 3 years; that
is, calculate D1, D2, and D3. Note that D0 = $2.25. 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
$54.70; that is, you expect to equal $54.70. Discounted at a 10%
rate, what is the present value of this expected future stock
price? In other words, calculate the PV of $54.70. 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 $54.70, 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.
Assume that g = 5% and that it is constant. Do not round
intermediate calculations. Round your answer to the nearest
cent.
$
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, ?
No. The value of the stock is not dependent upon the holding
period. The value calculated in parts a through d is the value for
a 3-year holding period. It is equal to the value calculated in
part e. Any other holding period would produce the same value of
.
Yes. The value of the stock is dependent upon the holding
period. The value calculated in parts a through d is the value for
a 3-year holding period. It is not equal to the value calculated in
part e. Any other holding period would produce a different value of
.
Yes. The value of the stock is dependent upon the holding
period due to the fact that the value is determined as the present
value of all future expected dividends.
No. The value of the stock is not dependent upon the holding
period unless the growth rate remains constant for the foreseeable
future.
Yes. The value of the stock is dependent upon the holding
period as long as the growth rate remains constant for the
foreseeable future.