What is the present value of expected future stock price

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Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.00 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 12%.

a) Find the expected dividend for each of the next 3 years; that is, calculate D1, D2, and D3, Note that D0=$2.00.

b) Given that the first dividend [ayment 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 expected P3 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=5% and that it is contant.

f) Is the value of this stock dependent upon how long you plan to hold it ? In other words, if you planned holding period was 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P0 ? Explain.

Reference no: EM13298705

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