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Last Year's Dividend (Do) $2.80

Growth rate for year 1 (g1) 25%

Growth rate for year 2 (g2) 18%

Constant growth rate year 3 on (g3) 8%

Required Rate of Return 13%

Dividend in Year 1 (D1) =

Dividend in Year 2 (D2) =

Dividend in Year 3 (D3) =

Price in Period 2 =

Discount back to today

CF0 =

CF1 =

CF2 =

I/YR =

Current Estimated Value (Po) =

If the stock was currently selling for $50, would you buy it?yes or no?

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Irving Heathcote
Irving HeathcoteLv2
29 Sep 2019

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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.
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Problem 9-17
Constant growth

Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2.75 yesterday. Bahnsen's dividend is expected to grow at 8% 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 11%.

Find the expected dividend for each of the next 3 years; that is, calculate D1, D2 and D3. Note that D0 = $2.75. Round your answer to the nearest cent.

D1 = $
D2 = $
D3 = $

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 D3and then sum these PVs. Round your answer to the nearest cent. Do not round your intermediate calculations.
$

You expect the price of the stock 3 years from now to be $124.71; that is, you expect to equal $124.71. Discounted at a 11% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $124.71. Round your answer to the nearest cent. Do not round your intermediate calculations.
$

If you plan to buy the stock, hold it for 3 years, and then sell it for $124.71, what is the most you should pay for it today? Round your answer to the nearest cent. Do not round your intermediate calculations.
$

Use equation below to calculate the present value of this stock.
      
Assume that g = 8% and that it is constant. Do not round intermediate calculations. Round your answer to the nearest cent.
$

You are analyzing Jillian’s Jewelry (JJ) stock for a possible purchase. JJ just paid a dividend of $1.50 yesterday. You expect the dividend to grow at the rate of 8% per year for the next 3 years, if you buy the stock; you plan to hold it for 3 years and then sell it. What dividends do you expect for JJ stock over the next 3 years? In other words, calculate D1, D2 and D3. Note that D0 = $1.50. Round your answers to the nearest cent. D1 = $ D2 = $ D3 = $ JJ's stock has a required return of 9%, and so this is the rate you'll use to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs. Round your answer to the nearest cent. $ JJ stock should trade for $204.07 3 years from now (i.e., you expect = $204.07). Discounted at a 9% rate, what is the present value of this expected future stock price? In other words, calculate the PV of $204.07. Round your answer to the nearest cent. $ If you plan to buy the stock, hold it for 3 years, and then sell it for $204.07, what is the most you should pay for it? Round your answer to the nearest cent. $ Use the constant growth model to calculate the present value of this stock. Assume that g = 8%, and it is constant. Round your answer to the nearest cent. $ Is the value of this stock dependent on how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, ? Explain your answer.

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