CONSTANT GROWTH Your broker offers to sell you some shares of
Bahnsen & Co. com- mon stock that paid a dividend of $2.00
yesterday. Bahnsens 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 12%. a.
Find the expected dividend for each of the next 3 years; that is
calculate D1 D2 and D3. Note that D0 14 $2.00. b. 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. c. You expect the price of the stock
3 years from now to be $34.73; that is you expect P^3 to equal
$34.73. Discounted at a 12% rate what is the present value of this
expected future stock price? In other words calculate the PV of
$34.73. d. If you plan to buy the stock hold it for 3 years and
then sell it for $34.73 what is the most you should pay for it
today? e. Use Equation 9-2 to calculate the present value of this
stock. Assume that g 14 5% and that it is constant. f. 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 P^0? Explain.
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