Question

You are analyzing a company's stock for a possible purchase. They just paid a dividend of $1.75, yesterday. You expect the dividend to grow at the rate of 7% per year for the next three years; if you buy the stock, you plan to hold it for 3 years and then sell it.   

The stock has a required return of 12%.

The stock will sell in three years at a price of $29.16

1.What dividends do you expect for year one?

2.What dividends do you expect for year two?

3.What dividends do you expect for year three?

4.What is the present value of the dividend stream (i.e. sum of the present value of the the future dividends)?

5.If you plan to hold the stock for three years, and then sell it at $29.16, what is the present value of the sales price in year three?

6.What is the most you should pay for the stock?

Answer 1

let me know if you need any clarification..

ans 1	What dividends do you expect for year one
	D1 =	=(1.75)*(107%)		$     1.87
ans 2	What dividends do you expect for year two
	D2 =	=(1.75)*(107%)^2		$     2.00
ans 3	What dividends do you expect for year three
	D2 =	=(1.75)*(107%)^3		$     2.14
ans 4	present value of divided strem
	i	ii	iii	iv=ii*iii
	year	Dividend	PVIF @ 12%	present value
	1	$     1.87	0.892857	$     1.67
	2	$     2.00	0.797194	$     1.60
	3	$     2.14	0.71178	$     1.53
				$     4.80
ans 5	what is the present value of the sales price in year three
	present value =		=29.16/(1.12)^3
			$   20.76
ans 6	What is the most you should pay for the stock
	Value of stock = present value of future divided + present value of sales price at year 3
			=4.8+20.76
			25.56