Question

Constant growth

Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $1.50 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 9%.

1. Find the expected dividend for each of the next 3 years; that is, calculate D₁, D₂ and D₃. Note that D₀ = $1.50. Round your answer to the nearest cent.
   
   D₁ = $
   D₂ = $
   D₃ = $
   
2. 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. Round your answer to the nearest cent.
   $
   
3. You expect the price of the stock 3 years from now to be $35.10; that is, you expect to equal $35.10. Discounted at a 9% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $35.10. Round your answer to the nearest cent.
   $
   
4. If you plan to buy the stock, hold it for 3 years, and then sell it for $35.10, what is the most you should pay for it today? Round your answer to the nearest cent.
   $
   
5. Use equation below to calculate the present value of this stock.
   ??????
   Assume that g = 4% and that it is constant. Round your answer to the nearest cent.
   $