Question

Please, provide detailed explanation.

5.Bristol-Myers Squibb Company (stock ticker is BMY) is expected pay a dividend of $1.86 per share at the end of this year and a $1.92 per share at the end of the second year. Immediately after Bristol-Meyers Squibb pays the $1.92 per share dividend at the end of the second year, you expect its stock price to be $62.10 per share. Bristol-Meyers Squibb's cost of equity capital is 13% per year.

a. What is the most that an investor would be willing to pay today for a share of Bristol-Meyers Squibb stock if the investor plans to hold the stock for two years? The highest price the investor should pay is: ????

b. What is the most that an investor would be willing to pay today for a share of Bristol-Meyers Squibb stock if the investor plans to hold the stock for twenty years? The highest price the investor should pay is: ????

c. At the end of the second year (e.g., at time t=2), immediately beforeBristol-Meyers Squibb pays the $1.92 per share dividend, at what price would you expect shares of Bristol-Meyers Squibb stock to be selling? Immediately before the time t=2 dividend is paid, a share of Bristol-Meyers Squibb stock should be selling for: ????

Answer 1

SOLUTION:-

• Given that, Bristol - Myear squibb company information
• Lets start with basic concept

(a) Let us consider for two years holding

amount receive after one year = $1.86

amount receive after two years = $1.92 + $62.10

= $ 64.02

price of stock =   

= 1.646 + 56.654

= 58.3

(b) Calculate the growth rate =  

= 0.03226

= 3.226%

present value of all the dividend till 20 years

  

Price of stock   

= 15.98 + 54.858

= 70.838

(c) here it means we are not going to receive Second dividend

amount receive in after one year = $1.86

amount receive after two years = $62.10

Price of Stock  

= 1.646 + 54.858

= 56.504

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