# CONSTANT GROWTH Your broker offers to sell you some shares of Bahnsen &amp; 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 D 1 , D 2 , and D 3 . Note that D 0 =$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 D 1 , D 2 , and D 3 , 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 = 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.

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

#### Solutions

Chapter
Section
Chapter 9, Problem 17P
Textbook Problem

## Expert Solution

### Want to see the full answer?

Check out a sample textbook solution.See solution

### Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

See Solution

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.

Find more solutions based on key concepts
Show solutions
In what ways are team cohesiveness and team conflict related?

Foundations of Business (MindTap Course List)

What is the purpose of depreciation?

College Accounting, Chapters 1-27

A firm is about to double its assets to serve its rapidly growing market. It must choose between a highly autom...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

Why should policymakers think about incentives?

Principles of Macroeconomics (MindTap Course List)

Fill in the blanks in the following table:

Economics: Private and Public Choice (MindTap Course List)