Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $1.25 yesterday. Bahnsen's dividend is expected to grow at 4% 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%. a. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. Note that Do = $1.25. Do not round intermediate calculations. Round your answers to the nearest cent. D1 - $ D2 = $ D3 = $ 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. Do not round intermediate calculations. Round your answer to the nearest cent. c. You expect the price of the stock 3 years from now to be $24.37; that is, you expect Pg to equal $24.37. Discounted at a 10% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $24.37. Do not round intermediate calculations. Round your answer to the nearest cent. d. If you plan to buy the stock, hold it for 3 years, and then sell it for $24.37, what is the most you should pay for it today? Do not round intermediate calculations. Round your answer to the nearest cent. e. Use equation below to calculate the present value of this stock. Po = Do(1+8) DI Ta -8
Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $1.25 yesterday. Bahnsen's dividend is expected to grow at 4% 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%. a. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3. Note that Do = $1.25. Do not round intermediate calculations. Round your answers to the nearest cent. D1 - $ D2 = $ D3 = $ 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. Do not round intermediate calculations. Round your answer to the nearest cent. c. You expect the price of the stock 3 years from now to be $24.37; that is, you expect Pg to equal $24.37. Discounted at a 10% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $24.37. Do not round intermediate calculations. Round your answer to the nearest cent. d. If you plan to buy the stock, hold it for 3 years, and then sell it for $24.37, what is the most you should pay for it today? Do not round intermediate calculations. Round your answer to the nearest cent. e. Use equation below to calculate the present value of this stock. Po = Do(1+8) DI Ta -8
Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 12P
Related questions
Question
Transcribed Image Text:Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend
of $1.25 yesterday. Bahnsen's dividend is expected to grow at 4% 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%.
a. Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3.
Note that Do = $1.25. Do not round intermediate calculations. Round your answers to the
nearest cent.
D1 = $
D2 = $
D3 = $
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.
Do not round intermediate calculations. Round your answer to the nearest cent.
c. You expect the price of the stock 3 years from now to be $24.37; that is, you expect P3 to
equal $24.37. Discounted at a 10% rate, what is the present value of this expected future
stock price? In other words, calculate the PV of $24.37. Do not round intermediate
calculations. Round your answer to the nearest cent.
$
d. If you plan to buy the stock, hold it for 3 years, and then sell it for $24.37, what is the most
you should pay for it today? Do not round intermediate calculations. Round your answer to
the nearest cent.
2$
e. Use equation below to calculate the present value of this stock.
Po = De(1+e)
D1
rg -8
Assume thatg = 4% and that it is constant. Do not round intermediate calculations. Round
your answer to the nearest cent.
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